As we enter a new year, it is an opportune time to reflect on the performance of the markets in 2021 and cast our eyes to the future. Looking back to the start of the previous year, we expected equity markets to deliver moderate returns; cautioned that many geopolitical risks were still in play; and set out that the structural shifts Covid-19 was bringing about in the global economy were not yet fully understood.
Yet despite this conservatism, equities markets had a banner year, with low interest rates and government stimulus packages fuelling the world economy as lockdowns and virus variants remained part of our lives. The S&P 500 index gained 4.5% in December and posted a 28.7% return for the full year, while the broader MSCI World Index gained 4% in December with a 19% return over 2021. Equity portfolio performances, in general, came as a most welcome surprise for most investors!
It’s worth noting that even as big tech companies continued to increase their market valuations, their growth was more muted in 2021 than 2020. The Nasdaq composite, powered by big tech stocks, climbed 21.4% in 2021, compared to its blockbuster 43.6% return in 2020. The energy, real estate and financial sectors all outperformed technology within their overarching S&P 500 index.
Surprisingly, despite the perception that big pharma continues to bank big money from Covid-19 vaccines, pharmaceuticals companies are not delivering outsized returns. Over the last two years, Pfizer has returned a cumulative 51.5%, in line with the S&P 500 at 49%, while AstraZeneca and Johnson and Johnson have lagged the Index at 15.2% and 18%, respectively.
Local markets
When we turn to the South African markets, the JSE ALSI Index delivered a very pleasing return of 29.2% in rand for the year. This compares to 6.8% for the MSCI Emerging Markets Index, when also measured in rand. We hesitate to attribute the JSE’s performance to positive domestic economic signals. The rand’s weakness – predominantly on the back of dollar strength and global stimulus programs – contributed meaningfully to the performance of this Index.
Resources, Industrial and Financials were all up in excess of 24%, so the JSE’s robust performance was not powered by any single sector. MTN gained 184% in 2021 but remains 35% off its 2014 high. Prosus and Naspers – the biggest combined weighting in the index – were both down 18% for the year, bucking the trend and capping what could have been an even further enhanced performance number from the ALSI.
Turning to other asset classes, listed property gained 37% in 2021 but remains down 3% per annum over the last three years and 4.4% per annum down over the last five years. Bonds gained 8.4% in 2021, outperforming cash at 3.8%.
Global outlook
If global stimulus was the fuel for growth in 2020 and 2021, the key question for 2022 is what becomes of the markets when central banks tighten monetary policy and governments wind down their relief programmes. Experts anticipate that the Fed will hike interest rates three to four times this year in an effort to tame inflation – which could withdraw liquidity and affect prices of asset classes from equities to cryptocurrencies.
A gradual tightening of Fed policy should also lead to a strong dollar for much of the year, at least until other central banks start to catch up. Recent commentary from Fed chair, Jerome Powell, indicates that the Fed is confident it can contain inflation without disrupting the economic recovery. Even so, many funds and investors are positioning for lower equities returns this year.
Much depends, of course, on how the pandemic plays out this year. Some observers believe that vaccines and the infectious nature of Omicron may turn Covid-19 into a manageable endemic disease over the year to come. However, we also cannot discount the possibility of new, vaccine-escape variants setting back the progress we made during 2021.
The talk of rising interest rates is prompting what some market analysts and leading global investment houses refer to as “The Great Rotation” – a switch from big tech and other stocks with rich valuations into ‘value’ stocks. Interestingly, these commentators’ description of rotational value stocks – as reasonably priced, with low debt, high margins, consistent profits, dividends, and healthy cashflow – is more akin in our view to quality rather than conventional value investing, which in a more traditional sense has been about buying companies at an absolute discount to net asset value.
This vindicates our focus on quality-style investing, in that it remains a defendable and preferable philosophy, even within a higher interest rate environment. In our newsletter, we have an article outlining why we remain committed to our strategy of focusing on quality global companies that can grow regardless of economic conditions, that provide a hedge against inflation, and that deliver dependable and increasing dividend streams in an environment where returns on cash and bonds remain unattractive.
The South African context
Other than externally driven factors, where SA is unlikely to escape higher interest rates and stubborn global inflation, we expect that domestic politics and poor policies will dominate market and currency direction during 2022.
The ANC remains divided and its internecine battles will intensify in the run-up to its elective conference. We are already seeing attacks on the courts and the Zondo Commission as the Radical Economic Transformation (RET) faction positions for the leadership contest in December. One cannot dismiss totally the risk that a RET candidate may prevail against sitting ANC and South African President, Cyril Ramaphosa, with Lindiwe Sisulu seemingly putting up her hand for that nomination.
Against this backdrop, we remain pessimistic about the ruling party’s ability to implement structural reforms, root out endemic corruption and improve service delivery. With low economic growth – forecast by the SARB to be 1.7% in 2022 and 1.8% in 2023 – accompanied by the rand’s vulnerability to internal and external shocks, we maintain our conviction that offshore markets offer lower risks and better return prospects than South Africa.
