The market volatility continued in February. Volatility can be interpreted as a negative, but we view it as an environment where you can use volatility to your advantage. Volatility creates opportunity. In the world we live in with low interest rates and low developed market bond yields, volatility is to be expected for a long time.
The market crashed in March 2020 due to concerns about the effects of the Covid-19 pandemic. Then it recovered strongly due to optimism that the vaccines will be effective and that global economies should recover. Fast forward to February 2021 when investors became increasingly concerned that the global recovery may be artificially strong due to stimulus, leading to higher inflation and consequently, higher interest rates. This led to a sell-off in bonds, first in the US and then spreading to Emerging Markets and Europe. The higher longer term bond yields affected the valuation of equity models which led to a strong pullback in equity markets.
We have also seen a welcome price depreciation in global and local technology and growth stocks and a market rotation where certain unloved sectors have found support in global equity markets (e.g. Energy and Financials). The JSE benefited from more price appreciation in basic materials (excluding Gold) as well as a rebound in the SA Listed Property sector of nearly 8%. At the time of writing, the US stimulus bill was granted, and this should continue to benefit the US Economy in the short term. We can expect markets to continue their volatile ride due to concerns of higher inflation and bond yields while we experience a global economic recovery on the back of successful vaccine rollouts and lower infection rates globally. We can also expect market participants (to buy into lower prices of growth stocks) and central banks (to intervene and prevent runaway inflation and much higher bond yields) to be active in capital markets.
Our portfolios and funds are well positioned to benefit from global fiscal stimulus, a global economic recovery which we think will underpin positive equity market sentiment in the absence of attractive alternatives in cash and bonds globally.
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