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IP Flexible Growth Commentary: July 2021

Market Commentary – July 2021

Whilst the Delta variant of COVID-19 continues to spread in developed and emerging markets, global equity markets remain buoyant as investors weigh the effects of the ongoing virus threat versus increased economic activity as large parts of the developed economies are achieving a more normalized environment due to the vaccination success limiting hospitalizations and deaths. Many emerging markets are struggling with the effects on economic growth, especially in countries like India, China and South Africa. Although it seems like the developed countries are ahead in the race against immunity, the fight is far from over.

At the time of writing the US congress approved an infrastructure bill for the United States. The Infrastructure Investment and Jobs Act includes $550B in new spending over five years, on top of $450B in previously approved funds. $110B would be allocated for roads and bridges, $66B for rail, $55B for water and wastewater infrastructure and $39B for public transit. There’s also money for ports, high-speed broadband internet, replacing lead water pipes and building a network of electric vehicle charging stations. Although the Senate must still approve the bill, the Democrats hold the majority vote, and the Biden administration wishes to stimulate the US economy despite its already heavy US Debt burden. This should bode well for US construction companies and will stimulate the job market comprehensively. All good for US equities and cyclical stocks across the globe as demand for industrial metals should support resource stocks in general.

Chinese technology company valuations have been trending lower relative to their US peers for months amid an escalation in regulatory intervention. The move over the past month has been much more severe and came after Chinese authorities banned for-profit tutoring on its school curriculum. This effectively wiped out a mainly online business model that has attracted major capital in the past.

The market response and spill over into the broader Chinese technology sector (and Chinese assets in general) seems to be based on fears that other business models could suffer the same fate, particularly considering a broader “regulatory clampdown”.  These events impacted the share price of SA Listed stocks like Naspers and Prosus negatively. Despite this our JSE held up well in July as Resources rallied and now form a larger part of the SA equity market indices relative to Naspers.

The other major factor in global markets remains the trajectory of inflation from here. Especially US inflation as the fiscal stimulus and infrastructure bill implementation could spur excess demand and drive US consumer spending to a point where US inflation may become a threat to equity market returns as the Fed will need to taper its QE process and bond buying spree.

Despite these factors, equities remain more attractive relative to bonds, cash, and listed property counters globally. Over the past three months, bond yields have receded sharply in the US and Europe, even as corporate profits surged. The improved earnings yields are making stocks more attractive relative to bonds, especially in Europe where the equity risk premium has risen to a 15-month high of 4.5 percentage points. Many strategists raised their targets for US and European stocks this month on higher earnings and lower rates forecasts in the short term.

Investors can expect ongoing volatility as markets weigh the potential negative effects of COVID-19 and a potential US inflation threat to improved company earnings growth as economies recover due to a return to a ‘more normalized’ world.

In SA we had some lockdown relief as President Cyril Ramaphosa moved restrictions to an adjusted level 3. We also saw the SARB keeping the repo rate unchanged at 3.5% with the Rand taking a little stumble thereafter. There also seems to be an end to the violence and looting in the KZN and Gauteng regions, for now. It is still not certain how the political rhetoric will play out and what the instigators of these events will do in the coming weeks and months, but we believe being cautious is the right stance to take.

During all this, we did however see sterling results from some of our mining companies declaring dividends of more than 10% (in dividend per share terms). The President’s cabinet reshuffle was mostly regarded as a step in the right direction but, unfortunately, didn’t raise many eyebrows. The SA government also announced an improved social grant. As SA citizens are known to be a nation of spenders and not savers, we believe that money should be going back into the economy via the purchases of consumer goods and essentials. This should bode well for some SA Inc counters, and consumer staples and financials.  We also are optimistic that our resource counters will benefit from the long-term infrastructure plans in the US and China despite a recent price collapse in Platinum, Iron Ore and Rhodium.

We remain constructively exposed to SA and global equities and within equity markets we prefer developed market stocks to SA/emerging market stocks and growth/quality versus value stocks. We do believe that one can afford some exposure to emerging market (EM) equities and value stocks as a lot of the bad news is already in the price and it may be appropriate to start buying back exposure in EM and value after the recent pull back.

Conclusion

With all this being said, it’s still a very difficult time to be managing clients’ money. The MitonOptimal and BVSA team believe that it is our responsibility to manage our clients’ capital in a calculated and prudent way and to protect them from major negative market scenarios. Our goal is not to try and continuously outperform other portfolio managers and always have the ‘best return figures’, but rather to give our clients peace of mind that their capital is managed according to their requirements without taking undue risk.

It is for this reason that we are now, more than ever, cautious when looking at valuations and ‘betting the house’ on such metrics. With varying views and market factors at play, we feel that the diversification that a ‘multitude of counselors’ approach provides us, is the best way forward. We are therefore sticking to our strategic asset allocations and counting on diversification when the market is unsure regarding future events.

Performance

Current Asset Allocation

 

Article by:
Roeloff Horne
Managing Director & Head of Portfolio Management

Jacques de Kock
Analyst & Portfolio Manager

&

Guillaume Oberholzer
Financial Advisor
g@bvsa.co.za
028 514 1102

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