29 Jan 2021
We’ve once again asked our panel of Investec Wealth & Investment strategists and other investment brains (from as far afield as Cape Town, Johannesburg and London) to answer a list of questions about the outlook for the year. Once again, there’s a broad range of views and angles about what are likely to be the key investment talking points for the coming year.
In addition to the ever-valuable insights of our usual contributors, we also welcome a couple of new faces, Zenkosi Dyomfana and Richard Cardo, who have really come to the party with their well-thought out contributions.
The broad range of views is, we believe, a strength of our business, since it implies a healthy and robust debate around the key investment issues of the day. It also means that this Q&A should not be considered as a “house view” – for that purpose, please refer to our latest Global Investment View, which provides a consolidated view of our Global Investment Strategy Group (GISG) and asset allocation teams.
(Many of those on our list are of course members of the GISG and asset allocation teams, where their broad range of ideas and opinions contribute to the overall risk score, commentary and asset allocations of our different committees. The result is a well-distilled process that guides the way we manage your money.)
Our panel is made up of the following:
- Professor Brian Kantor (economist and strategist)
- Barry Shamley (portfolio manager and head of the ESG Committee)
- Bradley Seaward (portfolio manager)
- Chris Holdsworth (chief investment strategist)
- John Wyn-Evans (head of investment strategy, Investec Wealth & Investment UK)
- Neil Urmson (wealth manager)
- Richard Cardo (portfolio manager responsible for the Global Leaders portfolio)
- Zenkosi Dyomfana (portfolio management assistant)
BS = Barry Shamley
BSE = Bradley Seaward
CH = Chris Holdsworth
JWE = John Wyn-Evans
NU = Neil Urmson
RC = Richard Cardo
ZD = Zenkosi Dyomfana
Q&A January 2021
Covid-19 remains the key topic for the year ahead and will likely remain so for some time. With vaccines being rolled out, what is your sense of the trajectory of the post-pandemic recovery and the timing of a return to “normal”?
CH: I suspect it will be very different for developed and emerging markets. Wealthy countries with competent governments will see a quick roll out of the vaccine, while poor countries and countries with incapable states may well see another round of lockdowns, as the only way to control the virus, before the virus is a thing of the past. The US is already rolling out over one million vaccinations a day and it should be just a matter of months before herd immunity is achieved both there and in the UK.
BK: Normal will be when herd immunity is attained, with the aid of vaccines. In the US I see this happening by the end of Q3 2021, in Europe a little later and in the UK somewhat earlier. In SA, not before Q1 2022.
JWE: It will happen gradually through Q2/Q3 2021 in those countries that have vaccine supplies. Normal will still include various restraints – eg masks/vaccine certificates for travel and mass gatherings.
ZD: We are witnessing, and will for some time, a multi-speed recovery, sector by sector, with those that were allowed to operate having some advantage, followed by those that opened in the early easing of restrictions. Medium- and larger-sized businesses have fared better, aided by their reserves and capacity. We are also beginning to witness divergent economic recoveries, with China rebounding well-above expectations, while the GDP growth consensus expectations is optimistic for the US and pessimistic for UK, France and SA.
The impact of the lockdowns is likely to have a long tail i.e., the economic consequences of the pandemic are still to be felt and fully transmitted through the system, as seen in increases in retrenchments
The best case is that 2021 is a year of structural adjustment to the new normal, and the new normal is something we will see in the first half of 2022 where we will have a trajectory change across businesses. The key risk to this narrative is the pace of vaccine rollouts.
RC: We are entering a new economic upswing. Economic growth in most developed markets should return to pre-Covid-19 GDP paths during the second quarter of 2021, given that developed markets are generally ahead in the roll-out of vaccines. Unfortunately, many emerging markets are behind the curve in vaccine procurement and distribution, so may lag by six to 12 months in their economic recovery – though China is the notable exception. That said, a rising tide lifts all ships so the expectation is that emerging markets will catch-up aided by buoyant commodity prices and demand and a gradually weakening dollar.
BSE: Similar to the K-shaped recovery in companies, I see the same in economies around the globe. Some economies will continue to thrive, while others will take a while to bottom.
BS: Normal doesn’t seem like its returning any time soon, but I suppose that’s what it always feels like in the midst of a crisis. We have passed peak uncertainty, but it will be some time until we can step back and count the cost to society. Central banks have intervened and mitigated much of the economic damage, but unfortunately there is only so much they can do. Many lives and valuable businesses have been destroyed. The initial economic bounceback has been rapid but for those starting again it will take some time.
NU: Developed markets should be back to normal by the end of the year, if not earlier. For emerging markets, it’ll be end of year for some and then end of Q1 next year.
What does the Year of the Ox hold in store for South Africa?
Experts from Investec were joined by deputy governor of the South African Reserve Bank Fundi Tshazibana to discuss ttheir take on the country’s growth prospects and the factors likely to shape South Africa’s economic recovery in 2021.
The pandemic has changed our lives in many ways. As we slowly get back to a normal way of life, which of these changes will become permanent and in which ways will we go back to the old ways of doing things? What are the implications for investors?
CH: Working from home is likely to stick, at least in part. I’m sure there will be much less business travel going forward too. Inadvertently, this may see a rise in productivity with less time wasted in traffic and waiting in airport lounges. A rise in productivity should see higher wages, at least for those who have retained their jobs.
Manufacturers have been forced to find ways to operate with reduced headcounts and some of this may well stick too. Many restaurants will not survive and many of the layoffs at the low end of the income spectrum may prove to be permanent.
The result of both of these trends is a rise in income inequality, something that is deeply unpopular even now. It may well be the case that Covid has accelerated the argument for wealth taxes and basic income grants.
Working from home may mean that corporates revisit the need for large scale head offices. Office rentals will likely take a long time to recover, while home construction takes off to build home offices (I’m not sure what the long term health effects will be from eating lunch at home vs at the canteen, but at least it will be a test of self-discipline).
RC: The health pandemic has pulled forward and accelerated our adoption of online technology, more flexible and remote working, and advancements and improvements in health and environmental safety standards. Technology enablers, internet platforms, cloud businesses and subscription services have benefitted substantially and will continue to do so. e-commerce penetration in the US has doubled since the end of 2019 and is now at a level of 33%, while the level of digitisation of businesses is up 60%, to a level of 55%, over that same time-period. Those companies that cannot embrace and lead in in e-commerce, the digital transformation of business, data handling, workflow automation, security of supply chain, wellness and hygiene, adopting a greater focus on the social contract and being more purposeful, will increasingly be left behind.
But humans are inherently social beings and as cocooning trends and mobility restrictions ease, we expect currently anxious consumers to embrace human movement and spend once again on many traditional ‘old normal’ experiences and goods. Notwithstanding the level of job losses and business failures brought on by the pandemic, US household incomes have increased by around a net $650bn, while US households’ net worth has increased by more than $5 trillion, and US households currently have around $1.5bn in excess savings to date. This means that once confidence returns, which it will, there should be a lot of pent-up demand and spend.
BK: Working from home is an option for more people. And the quality of the video links and other connections will improve, helping to develop the virtual office. Productivity of home work is still to be measured. The jury will be out for some time. Working together, as before, is necessary when it comes to collaboration, innovation and supervision. Working from home may not deliver as much as face to face. But much experimentation will be made. Trade-offs will be made when it comes to transport costs, office space and take home pay. The choices for workers and hirers are wider than before. We should be in no rush to discover what works best. Trial and error as always will decide the outcomes. No cookie cutter solutions – only gradual responses to choices exercised will be called for. The market processes will adapt, as always, and governments will be wise not to plan too narrowly or too far ahead. Public transport (roads, railways etc) may become less important and require less capital expenditure in the future.
ZD: The pandemic accelerated themes that were underway and one of those is the adoption of digitisation. Businesses have realised that certain functions, especially those that require fewer human interactions such as call centre operations, can be run remotely and this will eke out some cost efficiencies and improve profitability. Covid has given a boost to the willingness to try out online platforms for the purchase of products and services, and clear benefits of this are convenience and time saved. Going digital is now a fact of life (in the US there’s been an increase of 80% in first time users), so there is no getting around it anymore. As such, Covid has flushed out some of the bad business models and enabled the good ones. Capital will be looking for and rewarding good businesses that are agile and adaptable, with strong balance sheets and quality management teams.
BS: I think people have realised that they cannot take anything for granted. I think lives will be lived with a higher degree of caution and a greater appreciation for normality. Investors have endured volatility but have been rewarded for not panicking. I expect global central banks to continue to be very supportive as we manage our way out of this devastating crisis.
JWE: I think business travel will probably be the biggest victim. I see more working from home, but overall no real implications for investors outside of regular stock/sector selection.
BSE: Humans are social beings, so the need to congregate and meet in person remains a theme which I believe will stick. Relationships are truly forged face to face, however maintenance of those relationships can be done online. These allow for a couple of themes – less business travel, less need for business accommodation, which makes room for more leisure travel – a remote worker can operate from anywhere. So I believe that companies which cater to business travel will need to revisit their business models. Companies in the client service space will need to be more flexible with their staff. Investors will have to look out for companies which are ahead of the pack in these themes.
NU: I think the working environment will change somewhat but not as much as some people think. The adoption of technology has definitely accelerated. However, investors should continue to apply the same time-tested investing principles.
With Joe Biden in the White House and a Democrat “light blue” sweep in Congress, what does this mean for US economic policy? Will this be good for global growth?
CH: Biden’s policy agenda is likely to see more stimulus now and more taxes later. In aggregate this is likely to be positive for growth over the short term at least. However, assumptions of an easing of tensions with China may well be premature. At some point the US and its allies are likely to bump heads with China again, given China’s rising influence and competition with developed markets.
BK: I see more spending, more being given away, bigger deficits, bigger government and maybe higher taxes. I also see more hostile-to-business regulation. The Democrats will be friendlier to unions and the exercise of their protections. All of this is good for growth for now, but a bigger, more intrusive government is not helpful for growth in the long term and will become the case for voting out the Democrats.
JWE: I see more stimulus, higher taxes and wealth redistribution. On balance, I’m generally positive.
ZD: The Democrat victory in November 2020 is positive for global growth and equities. In the wake of the carnage from the pandemic, getting the virus under control, rolling out the $1.9 trillion fiscal stimulus package, business recovery and job growth will be prioritised by the new administration and this will increase the global economy. Corporate tax reversal could dampen economic growth in the US, but to a less degree. Other policy proposals including infrastructure spending, softening tariff rhetoric and higher wages should be net positive and largely offset the tax headwind.
The largest headwind for global growth in 2019 was tariffs. President Biden has emphasised reducing trade barriers and wants to build an international coalition against China as opposed to unilateral tariffs. Further, with the status quo re-established and the virus under control, we will likely see lower equity volatility and risk premia, and markets trending higher.
BS: US economic policy will be impacted far more by the aftershocks of the virus. What Biden and the Democrats will provide is stability and certainty, which has been sorely lacking under Trump. This should be beneficial for global growth as investors can invest with a greater degree of confidence.
RC: I would expect some immediate easing in global trade tensions and a rollback of the existing Trump tariffs and isolationist policies, which will be good for global economic growth and a tailwind for US corporate profits. The other focus near-term will be on increased fiscal stimulus, government spending and pro capital expenditure policies, which are more politically palatable given a health pandemic, and will support global economic growth. Democrat economic policies should benefit emerging market economic growth and help to keep the US dollar on the back foot, which in turn would be a significant boon for multinational (global) company earnings. The fear is that Democrat tax reform, the hiking of taxes and tightening regulation – particularly in the energy, healthcare, banking and technology sectors – will outweigh the abovementioned positive policies and prove to be a net material drag on corporate profits and economic growth. But that has become less likely a concern in the near term given the ‘light’ sweep: there is still a fairly even balance of powers in the legislative corridors, and likely easier wins to be made elsewhere as mentioned above. A Democrat sweep is typically good for the US stock market, which has on average generated returns of more than 13% over the subsequent 12 months.
Nonetheless the US remains a divided society. How will these divisions impact its growth and policy in the coming years?
CH: The Republicans have little ability to obstruct the Biden agenda, aside from appealing to more conservative Democrat representatives. This by itself will force the right further to the centre, which may well see further divisions in the right. In short, the Democrats will probably have it their way for at least two years.
BK: All societies are divided in opinion. Trump was an extraordinarily divisive personality. The progressive establishment hated him. The Republicans will need to come up with leaders who can also appeal to the Trump heartland and pursue his anti-woke agenda. The promise to drain the swamp will have much support – after the Democrats have revealed their colours (or is it colors?).
JWE: Biden’s policy will try to bridge divisions. However I should point out that the US is probably more unified in the “centre” than we give it credit for, although it’s the “wings” who get the headlines.
ZD: Biden talked about unity in the lead-up to his inauguration and in his presidential speech, stating that he will be a president for those that voted for him and those that did not vote for him. One of the tools his administration will lean towards to achieve this will be addressing inequality and racial economic injustice through minimum wage and social welfare budgets. This will likely result in increased consumer demand and economic growth. However, there is a regulation risk: the new administration could try to level the playing field when it comes to the market incumbents, through anti-trust laws and higher taxes. This could have an offsetting impact on the economy.
BS: I don’t believe that the US is as divided as is portrayed by the media. There are always those on the fringe who make a big noise and grab a lot of media attention, but ultimately there is the majority that just want to get on with their lives, make a living and interact with their fellow countrymen in an honest and empathetic manner.
NU: It all depends on numerous issues but at the margin the divisions in the US are a negative and have the potential to become really negative. I see inflation (through the policies to be adopted) as a definite possible consequence.
What are the implications on geopolitics of a Biden presidency? What does this mean for global trade policy, human rights and the environment?
CH: Positive for all three. The US is re-joining the Paris climate accord and we can expect an easing of trade tensions. However, Biden may well still push for an ‘buy American’ policy and US carbon emissions in 2018 were already 10% below 2005 levels. In effect, the optics may change but the final outcome may not be materially different when it comes to trade policy and carbon emissions.
BK: There’s more scope for flawed global institutions. The Democrats will also find out how little love there is for Americans. I see little change in the outcomes but I also see more of a virtue-signalling environment in which bureaucrats will meet with less resistance. The anti-woke Trump was an aberration. Will we see his populist type again? There are popular populists elsewhere - Hungary and Poland spring to mind. Or will we see him again?
JWE: Trade policy in general will be more helpful. However he could be more hawkish on human rights, which suggests continued pressure on China
ZD: Biden has signalled his administration will ease trade tensions against China and this is good for international trade. However, he has made it clear that he will be firm with China if it does not play nice, and his administration is committed to take on China’s abusive, unfair and illegal practices.
Climate change is one of the biggest global risks and Biden understands this. He has placed climate change at the forefront of becoming his signature policy and has already re-joined the Paris accord, and halted the withdrawal from the World Health Organisation. The US’s leadership in climate change is important in fighting it. The regulation in clean energy, electric vehicles etc. is about leading for the future as opposed to fighting to preserve a fossil fuel-based economy, and we have seen demand for that. This green shift is not likely to curtail growth but improve it, as new investments are made in this space.
NU: All good when compared to Trump – the question is, will it be as good as expectations?
What are your views on China’s positioning in all of this? How well is it placed in achieving its goals after the pandemic?
CH: China had a good crisis. Its economy now accounts for 15% of global GDP, two years ahead of forecast. Chinese GDP is due to overtake the US in 2028. However, China faces two long-term threats to prosperity – competition with established developed markets and demographics. Given the aging population in China, and the persistently declining working age population, it may well be the case that China gets old before it gets rich. In addition, rising competition in high-end manufacturing and intellectual property may well see an increasingly hostile relationship with the US and Europe.
BK: The Chinese are more respected but less loved. But they come with money and are a larger threat to the post-enlightenment societies that are increasingly ignorant of the reasons for their material welfare and political freedoms – freedoms that China does not respect. China offers a totalitarian and nationalist alternative. Free countries will need to keep up their guard and unfree countries are less likely to become free with Chinese assistance.
JWE: China is in decent shape to follow its path. Betting against it has not worked in the past and I’m not sure it will work now either.
ZD: China’s economy is recovering well. It’s ahead of all other economies and appears to be getting closer to achieving its ambitions of being the biggest and most powerful economy. A strong Chinese economy is good for commodities, emerging market economies and markets overall.
BS: While China has managed the pandemic well, I suspect it’s becoming increasingly antagonistic as it makes its mark as a global super power. Questions on its human rights abuses will remain a sticking point and create friction with many of its trading partners and investors. The world needs China and China needs the world. Hopefully external pressure will lead to some improvement, but it is a very delicate situation.
RC: Some near-term easing in global trade tensions should benefit China. But Beijing’s fourteenth five-year plan and new focus on import substitution will likely exacerbate distrust with the new US administration.
BSE: China has continued on its growth path, while the rest of the world remains hamstrung by Covid-19. The Chinese government takes very long-term views on its economy and remains in line to achieve those goals.
We have already seen bond yields rise and yield curves steepen. How do you see these playing out over the coming year? What is the potential for a policy mistake – either central banks tapering / tightening too soon, or tightening too late?
CH: I suspect it is inevitable. Given the rapid increase in global money supply and still damaged global supply chains, it seems that higher inflation is not too far off. The Fed will have a very difficult set of choices with a high probability of something going awry. The risk probably lies with higher-than-expected inflation.
BK: I would counter that we have seen very little steepening. Both short and long rates remain very low under central bank controls that are focused entirely on helping the recovery from Covid. Hence the money creation and debt management to facilitate government spending. I expect nothing to change until employment gets back to where it was. When we get close to full employment, the danger of hurried tightening or of not tightening will increase, and mistakes and market turbulence becomes more likely. Central banks know that they should not surprise the market. They will guide the market accordingly. But the bias for now remains more, not less, stimulus.
ZD: Treasury Secretary Janet Yellen urged Congress to “act big” on stimulus during her Senate confirmation hearing, arguing that the US can afford the record amounts of stimulus given low rates. She successfully talked yields down and they will likely remain anchored around the lower bound. Fed Chair Jerome Powell made it clear that the US central bank was unlikely to respond to any economic recovery too early and will not start the talk about tapering its purchases prematurely. It appears that the Fed has come to learn, from its past mistakes, of the risks of how and when this is communicated. Therefore, it is unlikely that we will see huge policy mistakes and the US should be in an accommodative environment in for a while.
BS: Developed market central banks have proven they are able to change tack quite quickly as the situation changes. I think they will continue to do so and while we may have brief periods of overshoot on either side, they will manage the situation with care and caution to best ensure growth and economic stability.
RC: G7 government bond yields will likely gradually rise further as the economic recovery progresses. But upward pressure on bond yields is likely to be restrained by the Fed’s extraordinary monetary stimulus program, a pushback if it looks like a rise in borrowing costs might upset the recovery, and a still temperate near-term inflation outlook. This means that currently elevated absolute equity multiples should prove resilient to a rise in yields, while the equity risk premium is currently high, offering room to absorb moderately higher yields. I do not expect any major short-term Fed policy adjustments or errors, and this view supports a lower-for-longer global yields and rates scenario for 2021. Do not try to fight the Fed or the liquidity wave.
BSE: I see the short end of the yield curve remaining relatively low, and limited scope for interest rate hikes through 2021. Once the vaccine rollout has been completed, we could start to hear talk of monetary tightening, likely only next year.
NU: I think there is big potential for an error and we are likely to see, in my opinion, tightening happening too late.
What does your answer imply for the different asset classes – equities, bonds, currencies and commodities?
CH: Commodities do well in a high inflation environment. In addition the Fed is likely to keep the long end of the yield curve depressed even as inflation picks up. This will force real yields lower, which will be very helpful for gold. Equities do well in higher inflation environments, as long as inflation does not spike too aggressively. Fixed income is unlikely to do well in this environment. Faster growth outside of the US should see US dollar weakness, further aiding commodities.
BK: Equities, rather than conventional bonds for now. Risk-on makes good sense when economic policy is unconstrained by fears of inflation or money supply growth. Insurance against central banks reacting too little or too late can be found in gold and inflation linkers.
ZD: In a low interest rate environment, equities do well while the zero bound limits upside for bonds and cash. Another tailwind for risk assets is the huge and coordinated cocktail of stimulus. The return to international norms should see a sell-off of safe-haven assets such as the US dollar, which is in a structural decline, and result in emerging market currencies and assets doing well.
BS: Consensus expectation is for a weaker US dollar, higher bond yields, higher commodity prices and some rotation from growth stocks to value stocks (and from developed market stocks to emerging market stocks). Markets often surprise you though. There is an element of exuberance /speculation in a number of asset classes and the bursting of those bubbles could easily cause a reversal back into the US dollar and US Treasuries.
RC: Equities typically do well and outperform other assets classes during an economic expansion phase. Although current absolute equity valuations may appear expensive at face value, they are not when low rates and reasonable economic growth prospects are considered. Equity earnings yields are attractive, relative to the low cost of money and fixed income yields. Earnings revisions and momentum will improve, and we expect corporate profits to recover and show growth in the mid to high 20s (percent) year-on-year this year, off a depressed 2020 base. Equities continue to be favoured over fixed income for 2021. But given stretched positioning and elevated sentiment in certain areas of the equity market, carefully selected bets are required.
Which are the markets / geographies to watch in 2021? Developed or emerging markets?
CH: Both! Developed markets for relief from the vaccine, emerging markets as a result of higher commodity prices.
BK: Equities in both locales. They are highly substitutable and move together. The rising tide will lift both boats. However I am not sure we will expect the US to underperform enough to cause further dollar weakness. This could reduce the case for emerging markets.
JWE: I prefer to look at the cyclical recovery by sector. On that basis, developed markets will lag.
ZD: As economies open up and investors become less concerned about global growth, appetite rises for risk assets. Emerging market assets, which have underperformed developed market assets for a decade, tend to do well in a risk-on environment. These assets are attractively priced, selling at significant discounts to intrinsic value, while emerging market earnings are also forecast to be higher than developed markets.
BS: Emerging markets provide some margin of safety from a valuation point of view but the concern is the impact on emerging markets of a rapid unwind of the carry trade, particularly those emerging markets with less favourable fundamentals.
RC: Emerging markets should outperform developed markets again in 2021 as they have a higher beta to improving economic growth and will benefit from a weaker dollar. But developed markets are leveraged to improving global trade, and likely beneficiaries of a more expansionary fiscal stimulus than is doable in emerging markets should also do well. But to sustain a wholesale shift as opposed to just some rotation into non-US markets, we would first need to see US absolute and relative corporate profit outperformance reverse after its dominance over the last decade, and I do not see that happening yet in 2021.
NU: A possible relative and absolute overvaluation in the US market is the main issue to watch in 2021, in my opinion.
What are the sectors to watch? Look at cyclicals vs defensive, growth vs value, offshore vs local, industrials vs resources, bonds vs equities, tech, or any other themes that are worth mentioning.
CH: Hard assets as inflation picks up, ESG and cyclical plays (banks, materials).
BK: Resource companies are the most compelling value play in a highly stimulated global economy.
JWE: Think “short duration” vs “long duration”. Resources look cheap, with good yields too.
ZD: Risk is more balanced, making gold, the US dollar, technology and defensive stocks less appealing and potential funding trades as investors unwind concentrated Covid-19 winners. Post-crisis recovery growth prospects favour high beta assets such as discretionary equities and cyclicals such as small caps and value stocks (the “dash for trash” trade). Governments around the world are looking to use fiscal policy to augment growth, which is a tailwind for commodities. However, vaccine rollout hiccups, coupled with the new wave and prolonged restrictions will place a floor on the rotation in the short-term until the virus is under control. This will likely drive investors concerned about global growth back to the safety of the US government bond market and the dollar. Notwithstanding the short- and medium-term rotation, gold has long-run advantages, it is commonly used as a hedge against inflation, and should do well as inflation picks up.
BS: I believe the changing perspective (catalysed somewhat by the virus) and weight of money moving into ‘sustainable’ companies will continue to provide a strong tailwind. Companies in any sector that provide a meaningful contribution to improving the long-term outcomes of our planet and society will continue to attract strong interest.
RC: The likely global macro-economic backdrop of continued (and unprecedented) monetary and fiscal liquidity, broader vaccine rollout and an economic upswing suggests some rotation to come from defensive, growth and technology winners, and large-cap stocks into more value, cyclical, economic ‘re-opening’ or ‘back to normal’ plays, and small-caps. Some rotation is also expected from the US, which has led the rest of the world for so long and into cheaper developed markets like Europe, which are a higher beta play on improving trade and better global economic growth. But this move has already played out for a few months now and may face bumps in its future direction of travel, depending on Covid developments, inflation expectations and the US dollar. I favour a barbell-type approach, with a preference for increased exposure to more globally economically sensitive, operationally leveraged stocks which are still ‘good quality’ in the industrial and consumer discretionary sectors.
It is worth adding some global bank exposure, as their relative valuations have room for a meaningful re-rating as credit risks diminish, yield curves steepen and underlying economic fundamentals improve. Fiscal stimulus, buoyant commodity prices and an attractive demand / supply dynamic suggest that commodity stocks should again perform well this year. But one needs to retain a still material exposure to winner-takes-all, long-term secular global growth stocks with staying power post the vaccine rollout in the technology and health care space.
BSE: Key sectors to watch are big data analytics, electric vehicle / hydrogen fuel cell-related commodities and gene editing/analytics.
NU: The main theme for me is: can the growth rotation continue and in the process extend the bull market?
Let’s go through the South African outlook. What do our growth prospects look like, subject of course to the pace of the vaccination programme and our historic growth constraints?
CH: Eskom is likely to be a constraint on growth for 18 months at least. Having said that, mining and agriculture are doing very well at this point. In addition there is a cohort of consumers that will come out of the crisis in a better financial position than they went into it with (incomes stable, forced saving due to the lockdown, a lower petrol price and much lower interest rates). We can expect the housing market to pick up and consumption to pick up aggressively too, as the vaccine is rolled out.
BK: Our ability to manage our economy in normal times was compromised. The task of managing a crisis intelligently and creatively proved to be beyond us. The Reserve Bank has proved a stumbling block to sensible policy reactions of the kinds adopted elsewhere and resisted locally.
ZD: The speed of the vaccine rollout will dictate the pace at which any economy rebounds. The delay in the vaccination process in SA will result in a prolonged and painful recovery to 2019 levels by mid-2023. The long-term outlook for SA is murky. The economy was in a structural decline pre-Covid and most of the causes such as large government deficits, ailing state-owned enterprises, weak consumer health, and high unemployment have been exacerbated by the pandemic. Expected continued dollar weakness and emerging market equity strength should hold down inflation and interest rates in SA and be helpful for the SA economy and stocks. The government infrastructure implementation will also give a boost to the recovery.
BS: If commodity prices continue doing well and the US dollar continues to weaken, the SA economy should improve meaningfully, despite the bottlenecks created by government policy and Eskom.
RC: Tighter fiscal policy, high public debt levels and a lack of structural economic reforms will remain ongoing headwinds for SA economic growth. Coming out of Covid, we do not have the same ammunition in our arsenal to ignite growth as other countries do. But a pick-up in global trade and a conducive commodity environment will provide cyclical support for SA this year. SA screens as cheap for a reason. Better value and growth prospects at less risk can be found elsewhere.
BSE: South Africa continues to shoot itself in the foot, with poorly thought-out regulation, disastrous management of the Covid vaccine rollout, ongoing issues at parastatals as well as deeply entrenched corruption across the public and private sectors. The South African equity market could benefit from a rising tide across high growth emerging markets, however the impaired investment case for South Africa will hamper GDP growth and investment into the country for years to come.
As growth picks up, to what extent will a) Eskom and b) high levels of government indebtedness remain a constraint?
CH: As noted above, Eskom will remain a constraint for at least 18 months. Government debt might be less of an issue. We expect inflation to get to above 5% in May this year, which should help with the debt stockpile. In effect, if nominal GDP growth gets to above 8% the debt stockpile should be manageable.
BK: They remain a constraint but need not be – introducing enough additional generating capacity is held up by the usual opportunism and patronage. The supply of vaccines has also been delayed and may yet delay the vaccination programme. And there is a strong case for ignoring the debt issues for now and printing more money, as there is for restraining government spending and tax revenues after the virus. Can the government do what is right in the short run and revert to sound policies for the long run?
BS: I believe businesses and consumers are rapidly adjusting to constrained electricity supply by Eskom by switching to renewable energy. This will continue to happen and will make these businesses more robust and relieve the grid somewhat. Government indebtedness is an issue and we are very reliant on ‘calm waters’ to navigate out of the mess we are in. Hopefully improving confidence, coupled with strong commodity prices, will assist in boosting government finances.
BSE: Growth will only likely occur from low base effects in 2020. South Africa could very well suffer from stagflation for years to come. Electricity availability and high levels of indebtedness, along with a squeezed tax base are major constraints to achieving above potential GDP growth and attracting foreign investment.
ESG factors (environment, society, governance) often get deprioritised as economies come out of a major recession. That appears not to be the case this time. What’s your view on ESG as an investment theme in 2021?
CH: It’s a hot theme at the moment and receiving much attention. The underlying benefit to investors is that ESG-compliant companies are more sustainable and should either generate higher returns or be less risky. I suspect at some point ensuring companies are ESG compliant will be part of all reputable investment processes.
BK: I am all for better corporate governance. I am concerned that self-serving managers can hide their disservice to shareholders behind the sustainability cloaks though.
JWE: The train is rolling and everyone has to be on it! Huge fund flows will continue.
BS: It will continue to grow at a rapid pace, partly in response to growing regulation and partly in response to growing investor awareness to its obvious merits. Increasingly it is becoming the norm rather than the exception.
RC: Covid-19 has led to a greater focus on ESG and particularly on the social contract. All role players from corporates to consumers to shareholders recognise the need for sustainability and are increasingly elevating sustainability targets alongside financial and investment targets. For investors, it has become a must have as opposed to a nice to have, and investment managers are required to meaningfully incorporate sustainability into their investment framework. Companies that communicate with, inform, embrace, and are best connected to their customers and the societies they operate in will prosper most. Purposeful companies will increasingly be better rewarded.
Tell us about what you think could be the big surprises in markets in 2021 ie asset classes, sectors or geographies that could defy consensus, either on the upside or downside?
CH: Inflation (on the upside), China being isolated, the EU recovery much faster than expected
BK: A big surprise would be South Africa putting growth in the economy first and not being concerned about who might benefit more or less from the growth. In other words, to put the interests of the poor first.
JWE: The UK could come back into fashion.
ZD: While technology stocks are extremely over-valued, they still have some secular long-term advantages in the new world order of digitisation and big data that will see them continue do well in the medium term and continue to grow into what looks like extended valuations. Notwithstanding the rotation out of developed markets into bashed up emerging market assets, US stocks are likely to continue trending higher against the backdrop of the huge US stimulus and Biden’s commitment to grow the economy. Bear in mind that most of the US companies on the S&P 500 generate a huge proportion of their earnings outside of the US. The combination of the stimulus package, pent-up demand, and supply shocks is likely to drive higher-than-expected inflation.
BS: Hospitality and commercial property companies have been hardest hit in the crisis. There is still limited appeal as the outlook remains murky. If we return to normal faster than expected, they could defy consensus which is still on balance negative.
RC: Many companies labelled as technology were the biggest beneficiaries of Covid-19 and experienced a pull forward in earnings brought on by the e-commerce transition and work from home trend. Consensus is that the market has now become too concentrated in technology, that the sector’s previous outperformance and valuation premium are too wide, that a ‘bubble’ is building, and that performance will lag going forward with a multiple de-rating. But tech remains misunderstood, with many investors unable to grasp the diverse range of business types in the sector and how to value them. Secular drivers of these businesses have distinct differences, and their prospects are not governed by just one factor. While we are due to see some rotation, I still expect many technology stocks to perform well in 2021, including more cyclical semis, tech hardware as well as certain software and services companies as demand recovers, supported by a global economic rebound and continued cloud and business capex growth. So I would not write off the technology sector this year – many of these stocks continue to make market share gains; they are still the strongest growth stories in the market, valuations based on free cash flow generation and intangible assets are generally still reasonable, and the market should continue to reward their consistency of performance.
BSE: Big surprises could include a return to dirty investments such as coal, tobacco and defence.
NU: An inflation surprises on the upside around mid to late 2021 with consequences for many asset classes.
What would be your “Grey Swan” events for 2021 – defined as events with a very low probability but a big impact (black swans by definition cannot be assigned a probability at all)?
CH: Much higher global inflation, significant US dollar weakness
JWE: China annexes Taiwan. Boris Johnson actually does something good. Another virus! Major hack/internet outage.
ZD: We could get a new variant of the virus that the vaccine doesn’t give immunity for. Such a scenario would have a devastating impact on health, a negative impact on activity, and loop the world back to a cycle of lockdowns.
BS: Relations between the US and China souring further, as China tests Biden on human rights issues.
ISIS making further inroads in Southern Africa and destabilising the region.
RC: A new health pandemic or a mutation/s of Covid-19, which cannot be contained leading to a shutdown of economies. A military conflict either in the Middle East or involving the US and China. And risks pertaining to debt levels and the Fed’s balance sheet, which has ballooned by over 75% since the start of the health pandemic, and trying to unwind it.
BSE: Reddit and Tik-Tok traders driving markets even higher, trading collectively in ‘pump and dump’ strategies sucking in sufficient inexperienced retail investors through platforms such as Robinhood, driving valuations to unimaginable highs only to become the world’s greatest financial disaster since 1929, wiping out trillions of dollars from those who can least afford those losses, and creating an even greater divide between the haves and the have nots.
There’s talk of a new “roaring 20s” emerging in the next few years, once the pandemic is largely behind us. Do you agree with that view? And if so, what are some of the developments that make you excited about the next 10 years? (or the things that scare you, if you disagree)
CH: Companies have been forced to experiment over the past year to find ways to operate. Some of those methods will see higher productivity as we get back to normal. In addition, the output gap has increased, pushing out the length of the cycle. I think inflation is the major risk but in aggregate I also think that Covid has raised the long-term growth outlook for the global economy.
BK: There will be a surge in demand for the good things in life as we experienced them before. The ability of businesses to cope with the crisis helps prove the point about leaving people largely to their own self-interested devices. They can cope with Covid and anything else that might hit them: worry less have more faith or, in reference to the Monty Python song – don’t worry about the baggage retrieval system at Heathrow (or anywhere else). It will be sorted out. And yes we need to invest in a health reserve as much as we need to invest in defending ourselves against any invader. What makes me scared is SA’s inability to defend itself.
JWE: A pent-up demand release is possible, but it could be short-lived. Technology convergence offers opportunities that we will have to get our heads around today (AI/MedTech, etc). Still not sure about autonomous cars, though! Would you ride in one?
BS: Investment inflows have been very concentrated in a small number of very large tech-focused (labour light) US companies with the result that the US equity market has materially outperformed most other markets for the last decade. If we have come to the end of that cycle (strong US dollar and growth outperforming value) and investments are more uniformly invested across the globe, it could result in material wealth creation on a broader scale, via increased employment and asset price inflation.
BSE: Until the Covid vaccine has been fully rolled out, I believe that we will rather see the “boring 20s” with countries like the US trying to mend broken relationships with the world and the UK grappling with a post Brexit world. The scariest outlook over the next decade is China becoming the world’s largest economy and the implications of having a communist superpower dominating the global economy.
NU: Yes, a roaring 20s is a definite probability and one of my reasons for expecting greater inflation. Just getting back to normal and getting on with some of the items on life’s “to do list” would be exciting!
About the author
Patrick writes and edits content for Investec Wealth & Investment, and Corporate and Institutional Banking, including editing the Daily View, Monthly View and One Magazine - an online publication for Investec's Wealth clients. Patrick was a financial journalist for many years for publications such as Financial Mail, Finweek and Business Report. He holds a BA and a PDM (Bus.Admin.) both from Wits University.
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