Despite patches of volatility in the global markets, we have ended the second quarter on a high note for global equities. Yet there is a sense that we are reaching an important inflection point as the US economy continues to recover at a blistering pace, with a successful mass vaccination programme allowing for the rapid reopening of key industry sectors and the rollback of remaining lockdown restrictions.
As a consequence thereof, the big factor that most economists and investors are watching right now is when the Fed will start tapering down stimulus and raising interest rates. Markets have whipsawed in response to the sometimes conflicting signals from the Fed. An announcement in early June that the Fed may need to raise interest rates sooner than expected — perhaps twice by end 2023 — sent markets into a mini panic.
The plunge in the markets was quickly reversed with the promise of further fiscal stimulus, helping to power key indices to new highs in the second half of June. The S&P500 index was up 8.6% for the quarter and the MSCI World 7.9%. Quality stocks helped to power markets to new highs, with cyclicals underperforming more recently because of doubts about levels of interest rates and other economic support.
Yet, as we have cautioned in earlier newsletters, we remain concerned about how long equities markets can continue to deliver generous returns. With vibrant jobs growth, consumers using stimulus cheques and savings to splurge, and new businesses being created at a rapid pace, US inflation is running ahead of expectations.
We believe that we may have reached an inflection point, where markets are concerned that the Fed may soon act on inflation. The dollar gaining 2.5% in the last month against its develop-market peers, reflects growing confidence in the US economic recovery as well as possibly foreshadowing tighter monetary policy in the months to come.
The words ‘taper tantrum’ have been whispered more than once this year, reflecting fears that US treasury yields may surge in response to indications that the Fed may begin tapering quantitative easing. This in turn, may lead to a rise in bond yields placing pressure on global equity markets, which would also trigger a sell-off in emerging market currencies.
A watershed for South Africa?
On the local front, the rand and JSE have had a relatively strong year to date, helping by booming global demand for commodities and risk-on in the global markets. I will not dwell too much on the performance of the rand since we have included a technical article outlining why we believe that now is a good time to externalise funds.
However, it is worth mentioning that the momentum behind the rand has slowed, with the dollar strengthening and commodities prices dropping significantly in June (gold was down 7.3% for the month). In a month with a mixture of good news and bad news for South Africa, it’s interesting to note that global factors (like the Fed and commodities demand) moved the market and the rand more than local news.
The JSE All-Share Index was down 2.4% for June, falling 5% from the highs earlier in the month before recovering slightly into the close, yet this isn’t enough to erase a positive year to date for the Index, which is up 13.2% for 2021. However, with renewed Level 4 lockdown measures in place and softening global demand for commodities, the fragile recovery of the South African economy might falter, dampening equities performance for the rest of the year.
In other news, a 15-month prison sentence imposed on former President Jacob Zuma by the Constitutional Court could be an inflection point for South Africa. The sentence reaffirms the rule of law in South Africa, yet it remains to be seen whether Zuma will hand himself in to serve his sentence and what impact his imprisonment will have on galvanising ANC factional support against the incumbent president, Cyril Ramaphosa. Professor Ivor Sarakinsky has more on this subject in his article entitled “The justices deliver accountability – at last”.
We remained generally concerned about the slow pace of economic reform in South Africa, compounded by the glacial vaccine rollout. As such we retain our bias towards offshore investment, particularly in developed markets, where vaccines are being rolled out more effectively and where we are seeing signs of sustainable growth going forward.
As per recent communications, we favour quality equities since we believe global equity markets may experience some volatility due to inflation considerations in forthcoming months and a tempered earnings growth rate for 2022. Our bias towards quality is focussed on companies that have relative certainty of their future earnings streams, and their resilience against adverse and currently identifiable risks that may lie ahead.
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