By October month-end last year, global markets were facing massive risks to sustained recovery prospects. The looming US election was turning ugly, while there were still major concerns over the success of the Covid vaccine trials.
As we stand one year later, the MSCI is up 39% as measured in dollars, this being significantly higher versus bonds and REITs, with dollar cash having returned basically zero. Central banks will look through the inflation spike while the impact of an uptick in Covid-19 cases is unlikely to overwhelm healthcare systems. As a result, we believe equity markets will continue to be the asset class of choice for 2021, although there may be some volatility along the way.
US stocks are at all-time highs amidst fresh signs that corporate America is delivering on lofty earnings expectations that have propelled major indexes toward the best month in a year, with profit margins widening, despite cost pressures. Treasuries continue to fluctuate, with some portions of the yield curve inverting.
Investors are now digesting earnings from some of America’s bellwether companies, with the likes of Caterpillar, Ford and others in the S&P 500 reporting improved net profit margins. Shares of Apple and Amazon, which reported after the bell on Thursday, are likely to be down on Friday as the futures indicate the market was expecting more from their updates.
The risk remains that sentiment could weaken if investors lose confidence in the ability of policymakers to contain inflation while nurturing the economic rebound.
In South Africa, the rand extended its losses on Thursday and Friday – primarily on the back of a stronger dollar, with continued power cuts and traders’ caution ahead of local elections both weighing further on sentiment. However, the JSE still managed to rise by 0.7% this week (at the time of writing), providing some hedge against a sharply weaker rand, down 3.4% since Monday.
As highlighted in last week’s news flash, we continue to believe SA-specific risks are not being adequately factored into current exchange rates and expect a weaker bias to the rand during 2022.
“Markets will always remain imperfectly perfect, the time you get to know correct valuation, the opportunity becomes out of reach, or vice versa.”
– Sandeep Sahajpal, The Twelfth Preamble: To all the authors to be
- Europe’s main stock markets were mixed. The euro was in retreat on Thursday as it awaited the outcome of a key ECB meeting, while the eurozone and wider economy battle high inflation. Concerns over renewed US-China tensions and US President Joe Biden’s social spending plan were also in play on Thursday.
- During the ECB meeting, President Christine Lagarde stated that inflation drivers were expected to moderate, and that the euro area economy continues to recover strongly, although at a more moderate pace. “While inflation will take longer to decline than previously expected, we expect these factors to ease in the course of next year. We continue to foresee inflation in the medium term remaining below our 2% target. Our policy measures, including our revised forward guidance on the key ECB interest rates, are crucial to helping the economy shift to a sustained recovery and, ultimately, to bringing inflation over the medium term to our target.”
- In the US, democrats are poised to consider a plan that will upend tax rules for the wealthiest Americans. Senate Finance Committee Chairman, Ron Wyden, has made a late bid for a new capital gains tax in President Biden’s social-spending and climate-change legislation. Lawmakers’ reaction in the coming days will determine whether the idea advances or joins the pile of other tax proposals that Democrats have floated and cast aside this year amid objections from moderates, progressives, or both.
- However, there doesn’t seem to be support for the billionaire tax to get it through Congress, raising new uncertainty as to how Democrats will pay for the president’s agenda. The House, instead, is discussing with the Senate inclusion of a 3% surtax, on top of the income rate for those earning more than $10 million.
- Tesla has joined an elite group of companies with market values of at least $1 trillion on Monday, as news that Hertz announced it will buy 100 000 Tesla vehicles for its fleet pushed the stock up 13%. This is a key milestone for the Elon Musk-led carmaker whose shares have been climbing amid a global shift to electric vehicles. Tesla has become the second fastest company ever to reach this mark, taking just over 11 years since its public debut in June 2010. Only Facebook reached this milestone faster.
- On the heels of a weak fourth quarter growth forecast from social giant Snap, and a revenue miss from social titan Facebook, you would have been forgiven for having low expectations for other big tech firms. However, pushing back against what could have been construed as a budding narrative, both Microsoft and Alphabet – Google’s parent company – smashed revenue expectations.
- In China, few people could have predicted the downward spiral for the Alibaba Group, when founder Jack Ma delivered a blunt criticism of China’s financial system last October. Yet, one year on, the technology titan has lost a whopping $344 billion in market capitalisation – the biggest wipe out of shareholder value globally, according to data compiled by Bloomberg.
- In Covid news, the International Monetary Fund is requiring many countries to conduct independent audits of how the emergency funds were spent before it approves new loans. This follows its disbursement of $118 billion in emergency loans to 87 countries to help them through the crisis. In Africa, Latin America, and other regions, the receipts are not adding up, and some officials have landed in jail.
- BNP Paribas has detailed several scenarios for South Africa’s municipal elections – set to be held on Monday, 1 November – with a particular focus on whether the ANC will slip at the polls. Read more on the possible scenarios here.
- Compounding this, power utility Eskom is said to be in crisis and started implementing scheduled power cuts during the past week because of further breakdowns at its coal-fired power stations. While headlines have focused on a loss of generation capacity, the transmission infrastructure is also in dire need of repair to restore the grid to some semblance of reliability. This week alone, total breakdowns amounted to almost 15 000 MW, while over 5 000 MW was unavailable due to planned maintenance.
- National Treasury has asked Parliament to postpone the unveiling of the medium-term budget policy statement by a week to allow officials breathing space after next week’s local government elections. This means Finance Minister Enoch Godongwana will now present his debut policy statement on 11 November.
- Miner Sibanye-Stillwater has signed a R14.7 billion deal to acquire two Brazilian mines, its fourth and largest investment yet in a push to build a portfolio of metals critical to electric vehicles. This news was announced on Tuesday and is expected to conclude in the fourth quarter of 2021.
- Famous Brands has seen stringent efforts to adapt to Covid-19 operating conditions help it return to profit in its half year to end-August, but its recovery was slowed by a hit from South Africa’s civil unrest in July. The company, owner of Steers, Wimpy and Debonairs Pizza, reported revenue up 50% to R3 billion year-on-year, but 22% down from before Covid-19.
- South Africa has joined a select club of countries offering Covid-19 vaccines to children as young as 12 years of age. It’s a move that will not only boost the country’s immunisation campaign but may go a long way to offering protection to families, teachers and limiting disruptions to schools as they go into the year-end examinations.
Sources: Dynasty, Bloomberg, BusinessLive, BusinessTech, Moneyweb, Vestact, Wall Street Journal, TechCrunch, AFP, etc.