Despite a bit of a rollercoaster ride for big tech shares in the first quarter of 2021, the global equity markets were robust during the quarter ended 31 March 2021. The question on everyone’s lips is how much longer the markets can show such resilience and what changes we can expect to see as vaccine rollouts in richer countries enable them to end lockdowns.
During the first quarter, global markets and cyclical stocks in particular delivered healthy returns. The S&P500 Index ended the quarter up 4.38% and the MSCI World Index was up 3.04%. Perhaps surprisingly for investors used to lukewarm returns from the South African market, the JSE was a star performer. For the quarter to end March, the JSE was up 13.14% in rand terms.
As we look ahead to the rest of the year, themes we expect to dominate include large-scale government infrastructure spending as well as the potential impact of the gradual winding down of central bank and government stimulus programmes. Global disparities in the pace and coverage of vaccination programmes will also shape how different markets perform.
The commitment to infrastructure spending by governments from the US and UK to South Africa and China is broadly positive for markets, especially those with heavy commodities exposure. Indeed, US President Joe Biden’s commitment to a $2 trillion investment in America’s infrastructure and its shift to green energy helped to boost equities after fears that inflation was set to lead global interest rates higher.
Paying for stimulus programmes
Yet the boost from these grand, multiyear infrastructure programmes is offset by the reality that government stimulus programmes need to end at some point and, when they do, they will most likely be paid for via higher taxes. In emerging market countries, we are also seeing interest rates starting to rise as central banks act to contain the threat of inflation.
With so much stimulus pumped into the global economy and markets running so hard despite the pandemic, investors may be benefitting from returns borrowed from the future. Indeed, if we look at the example of China, where the CSI 300 Index fell 15% from its February high to be 3.1% down for the quarter, we can see what may lie ahead when concerns about tighter monetary policy win out over optimism about the post-pandemic recovery.
With this in mind, we continue to focus on quality as a sustainable, defendable way to gain reliable returns over the medium and long-term, regardless of the cyclical upswings we will see in sectors such as commodities and construction. We are also keeping a close eye on the vaccine programmes worldwide with a view to identifying funds and indices that are likely to benefit from post-lockdown structural shifts.
Another topic drawing interest among our clients and investors in general is the shift towards Environmental, Social, and Governance (ESG) investing. We have dedicated one of the articles in our newsletter this month to looking at ESG investment trends and detailing how ESG fits in with our wider investment philosophy.
What lies ahead for South African markets?
The boom in infrastructure investment should, at face value be more good news for the JSE after its stellar start to the year. However, we continue to maintain a strong offshore bias because we believe there are still broader and deeper opportunities to be found outside South Africa. We feel that current (relative) rand strength offers an opportunity to incrementally diversify by externalising funds.
While the JSE’s performance for the year to date is to be applauded, it is worth bearing in mind that the rand has weakened by around 8.1% per annum over the past 10 years. That’s despite the relative stability since the dramatic drops we saw due to Nenegate and the emerging market sell-off in 2015-2016.
In this newsletter, we feature an article where we outline our rationale for offshore investing and make the case that it is not just about protecting yourself from rand depreciation. Political risk, along with a slow vaccine rollout, pose significant danger to the wider economy in the year to come. We also encourage you to read Professor Ivor Sarakinsky’s opinion article for a perspective on how ANC internal politics may play out in the months to come.
