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Investor’s guide to 2021: what’s next for SA and the world
Will 2021 see some sort of return to normal, or will the great disconnect of 2020 continue? MAARTEN ACKERMAN shares his views. AS WE enter 2021, the market’s recent bout of festive cheer will have left many investors feeling upbeat. However, do not allow yourself to be carried away by the market’s high spirits. While there are many reasons to feel positive about the year ahead, it is equally important to note what markets seem to have forgotten – namely the pandemic and its consequences are not yet behind us. Globally, there is a clear disconnect between market cheer and the economic situation on the ground, as many businesses and households remain under pressure while the global economic recovery slowly grinds forward. Unemployment levels have risen worldwide, placing pressure on consumer income which will, in turn, impact on businesses and corporate profitability. Additionally, many companies and consumers will come under intensified pressure following a second wave of lockdowns. That said, all is not doom and gloom. Efforts by governments to inject money into their economies continue to underpin markets, buoying sentiment and valuations. And Joe Biden’s presidential win has been seen as market positive, particularly in terms of global trade relations. Then, the speed with which Covid19 vaccines have been developed and are being rolled out represents a significant psychological victory over the virus. While the vaccines
are not an immediate cure for the global economy, their availability has boosted hope for a swifter-thanexpected return to normality. Where can investors turn? Despite the many headwinds still facing markets, it is important for investors to keep in mind that with the economic trough behind us, the Covid-19 reset means we are now entering the upswing of a new business cycle. Although the road to recovery may be long, this is a positive for global equity markets. Furthermore, Biden is expected to borrow heavily to extend support for the US’ social programmes, resulting in a softer dollar, which should in turn support equities. Central banks are likely to keep interest rates low in order to afford the debt generated by unprecedented fiscal stimulus. So, with cash and bonds providing neither investment protection nor safety, investors need to consider alternatives that offer some protection while still providing cash-beating returns.
UNDERSTANDING THE RISKS
Equity investments are not without their risks, especially as many companies will face a challenge to earnings in the coming months, placing pressure on dividends and share prices. Perhaps the biggest risk is that central banks will withdraw stimulus before companies are
able to generate reasonable profit numbers. Picking quality, fairly valued companies with a low risk of going bankrupt will therefore be particularly important in this tough economic environment. Additionally, investors need to look for companies that are well positioned for a post-pandemic world, and that are well positioned for a world in which the fourth industrial revolution is gathering momentum.
Perhaps the biggest risk is that central banks will withdraw stimulus before companies are able to generate reasonable profit numbers.
SA LAGGING ECONOMICALLY
South Africa is currently lagging behind its peer group economically, and once the equity rally has faded and markets look past global drivers, our looming fiscal cliff and debt issues are likely to be reflected in our asset classes. The majority of earnings produced by JSE-listed companies are generated outside of South Africa. However, headwinds in the global environment could filter through to the local exchange as well, while a deteriorating fiscal situation and structural economic issues could hamper the prospects of those companies which operate only in South Africa. Investors thus need to look for exposure to companies that offer some immunity against the local environment. Local bond yields were around 9% in March 2020 and, following the Moody’s downgrade to sub-
investment grade, they exploded to 13% to compensate investors for the higher risk of government default. Since then, however, yields have returned to 9%, seemingly indifferent to the fact that our fiscal situation has significantly deteriorated due to the pandemic, and that our budget deficit will be twice the size anticipated at the start of 2020. In light of this, it is highly unlikely that the local bond market will continue to trade at current levels indefinitely.
PROSPECTS FOR THE RAND
The current strength of the rand against the US dollar clearly reflects international factors such as the US election outcome, vaccine developments and an abundance of liquidity. The first bump in the road, however, will be the February Budget Speech, which is likely to remind investors of our poor local economic fundamentals. Eventually, as investors wake to South Africa’s economic
reality, the rand will come under some pressure again and is likely to weaken during the course of the year. However, the extent of this weakening will ultimately depend on the government's progress on fiscal reforms. This is an edited version of a report by Maarten Ackerman, chief Economist and advisory partner, Citadel.
