There has been a sharp recovery in equity prices since November 2020 when Biden was elected as president and implemented a huge stimulus package for the US, plus there has been great optimism about the Covid vaccine roll-out in developed markets. Local equity markets were predominantly driven by the resource sector due to the sharp rise in the price of oil and basic resources. It is also interesting to note that the industrial sector is lagging, as the companies that initially benefitted from the Covid pandemic are now under-performing as markets return to a ‘more’ normal environment.
The question becomes, is this strong recovery sustainable? We know that most central banks are still stimulating their economies by adding massive fiscal stimulus, which is fuelling developed market consumers with excess cash and savings. Central banks are maintaining low interest rates and our experience has certainly taught us not to bet against it. We do believe that certain equity sectors are trading at demanding levels, but many sectors and stocks remain attractively priced as the global economic revival takes place and monetary and fiscal stimulus in developed markets assist companies to beat expectations by a handsome margin. This also applies to locally listed resource companies. This news flow fuels optimism that economic lockdowns have inflicted less damage than feared and that management teams (and their customers) have been able to manage around political and regulatory changes better than during the initial lockdowns. The US also plans infrastructure spending programs which all bode well for commodity prices and resource companies on the local bourse. The result is that we see investors rotating exposure out of expensive growth/technology stocks to value/cyclical stocks. Stock-picking is becoming more and more important in the current scenario.
There were concerns about the rise in the 10yr USGB yield driven by expectations of rising inflation and this initially impacted our SA bond yields as we are preparing for the effect of the sharp increase in fuel and electricity prices. Bond yields retreated slightly from recent highs, and the US 10-year yield is trading close to 1.6%. This yield remains the barometer of risk sentiment and inflation fears. The recent stability in US yields was driven by the Fed firmly signalling that they remain in no hurry to withdraw monetary stimulus and will wait for higher inflation and employment gains to appear before they will consider hiking rates.
These inflation fears were more than allayed by the good trade balance figures which takes a lot of pressure off Tito Mboweni and his SA budget. We saw a low inflation figure (3.2%) coming in and the ZAR powered ahead after problems in Turkey and a new rampant outbreak of Covid in India diverted foreign flows to SA.
Since the US rates declined, commodity prices have surged again; especially metals like copper and palladium, and the oil price also held firm.
The 10-yr SA bond yield currently trades just above 9% which is at the same level as Pre-Covid19 and comes at a time when bond yields have declined worldwide over the same period. This yield is attractive to foreign investors on a risk-adjusted real return basis, especially to investors in developed countries where the government bond yields are negative.
Much focus remains on SA’s fiscal position as wage negotiations with public sector unions begin in earnest. Positively, another strong trade surplus highlighted the extraordinary benefits that the recent surge in commodity prices (on the back of global economic recovery hopes as economies reopen and the recent waves of fiscal support) has had for SA, which is also being reflected in upside surprises to tax revenue collections. Stronger terms of trade were well reflected in outperformance by the Rand, which strengthened from 14.78 against the Dollar at the end of March to 14.25 at the time of writing.
We remain constructively optimistic that we will be able to generate solid absolute returns in an environment where cash remains unattractive relative to most other asset classes.
Roeloff Horne
Director and Head of Portfolio Management
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