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Maarten Ackerman
Chief Economist and Advisory Partner


Will investment fundamentals return in 2021, or will the great disconnect that began in 2020 continue?

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 that 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 or even third wave of lockdowns, as seen locally and in Europe and the United Kingdom (UK).

That said, all is not doom and gloom. Monetary and fiscal stimulus continue to underpin markets, buoying sentiment and valuations. Furthermore, Joe Biden’s United States (US) presidential win has been seen as market positive, particularly in terms of global trade relations, with many looking forward to seeing him and his administration settle into the White House this month.

Then, the speed with which COVID-19 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-than-expected return to normality.

Additionally, although many countries – including South Africa – have been forced to reimplement heightened lockdown restrictions, the lessons of 2020 have meant that most governments have realised that their countries cannot afford full lockdowns. Instead, governments have introduced more regional-focused restrictions. These have caused some drag on recoveries – seen in the soft patches re-emerging in recent economic indicators around the globe – but have avoided a great deal of the financial turbulence.

Overall, coming off the very low base set by 2020, global economic growth is expected to rebound between 4% and 5% this year, before slowing to more trend-like growth of 2.5% over the next two to three years. It’s vital to keep in mind, however, that this is the growth number rather than actual GDP levels; we only expect the global economy to recover to its pre-COVID levels towards the end of 2022. Even if it achieves the stronger growth anticipated this year, global GDP will then only reach pre-2019 levels – a challenge which could represent a significant headwind for companies over the next few years.

The rapid rollout of the vaccine taking place in the West is positive to see, but this process is still in its early days and there is still a long road ahead. We will be watching to see whether various countries are able to stick to their targets, or whether risks such as issues with the mutation of the virus or logistical problems throw a spanner into the works.


Following the hotly contested national election in November 2020, Democrat Joe Biden has finally assumed the presidency, despite Donald Trump’s many political antics. Additionally, the US’s first female Treasury Secretary, Janet Yellen, has stepped up to the plate. Together, Biden and Yellen are committed to offering more social support for consumers and businesses, which in turn will ramp up government spending and raise debt levels. As a result, recent US dollar weakness is likely to continue, as we expect monetary policy to remain fairly easy with low interest rates to enable the US government to afford this debt. This is another nail in the coffin in the case for US dollar cash as an investment, owing to a lack of yield.

Meanwhile, the US Federal Reserve (Fed) has also expressed its concern about potential economic risks, especially given the speed of the spread of the virus and the large number of regional lockdowns seen worldwide. The Fed has also indicated its readiness to support the US economy further.

More fiscal stimulus was approved during the festive season and given Biden and Yellen’s supportive stance, it appears that the US will continue to offer financial relief until the economy recovers, the vaccine is rolled out and some degree of normality returns.

Coming off a low base after the huge decline in economic activity during 2020, coupled with the amount of stimulus already pumped into the system, means that the US appears set to achieve 4% GDP growth this year. Thereafter, the country should slowly subside back to 2% capacity growth over the next two to three years, despite lingering challenges for specific industries and companies which have been particularly hard-hit by the pandemic.


While the rest of the world continues to grapple with new waves of the virus, life in China appears to be approaching “normality” faster. Despite images of large mask-clad crowds taking to the streets to celebrate the start of 2021, China continues to report relatively low cases of the virus each day – a somewhat suspicious claim which has made many distrust China’s data.

Additionally, where other countries have yet to regain pre-COVID economic levels, China has already clawed back everything it lost in the first half of 2020. Notably, for example, the country’s latest Purchasing Managers Index figures recently reached a three-year high, demonstrating China’s strong economic progress. As a result, the International Monetary Fund (IMF) has identified China as the main driver for supporting global economic growth to return to pre-COVID levels over the next 12 to 18 months.

Notably, however, there is one key difference in China’s prospects in the wake of the pandemic – the world’s attitude towards the country has undergone a seismic shift, with rising tensions fracturing long-standing trade relationships as its major partners look for possible alternative markets. Formally this can be seen in Europe’s relationship with China, while informally countries such as Australia have adopted a tit-for-tat approach to trading with the economic giant, implementing measures such as preventing Chinese students from returning to the country to study.

So, while economic growth in China is expected to reach a robust 8% off the back of a low base (well above government’s target of 6%), it will then start to decline, falling below 5% over the next two to three years as trade headwinds from the rest of the world pick up.


Regional lockdowns are currently in place across Europe as it continues to grapple with new mutations and rising numbers of COVID-19 cases. European Central Bank (ECB) President Christine Lagarde has mentioned that, much like the Fed, the central bank is likewise worried about the continued impact of the virus and lockdowns, and what these may mean for the region’s economic recovery. She specifically noted that as 75% of Europe’s economy is service-based, restrictions could have a particularly hard-hitting effect, given their impact on restaurants, and the entertainment and leisure industries.

Ultimately, Europe’s recovery is likely to be slower than many expect. It is, therefore, positive to see that like other central banks around the world the ECB remains willing and able to offer monetary support as needed to support governments, companies and households through providing access to cheap credit. The ECB only expects a full economic recovery in 2022 – by which time the vaccine should have rolled out enough for populations to have developed herd immunity, allowing the slow return to business as usual.

In the meantime, the central bank approved another €500 billion to its pandemic-related support and prolonged it until March 2022, which means that Europe should easily be able to achieve as much as 4% growth in 2021 from a low base in 2020, before settling to capacity growth of around 1.5% over the next two to three years.


Against the backdrop of Biden’s presidential win, a softer US dollar, the roll-out of vaccines and an abundance of liquidity, South Africa (like other emerging markets) has been basking in the glow of risk-on sentiment – the benefits of which are perhaps most evident in our local bond and currency markets. But, much like holidaymakers who allow festive cheer to tempt them into spending freely on credit, South Africa’s bill will eventually come due, forcing government to return to reality and face its fiscal demons.

So far, foreign investor support from the local bond market together with the IMF’s loan have kept the country from feeling the worst effects of the pandemic’s devastation. But the holiday will eventually end, and government will need to tighten its belt significantly at the end of the three-year fiscal framework - or towards the end of 2022 and moving into 2023 – especially as its first IMF loan repayment will come due.

Even before COVID-19 hit, South Africa had travelled a long way down the road towards a fiscal cliff on the back of an unsustainable and unhealthy government budget – the pandemic simply accelerated the journey to the precipice. If we are to avoid a sovereign debt crisis or the risk of defaulting on our loans, government will urgently need to implement long-awaited structural economic reforms, and markets will be watching for evidence of action rather than simply more talk over the next 12 months.

Fortunately, this does finally seem to be on government’s priority list. During his speech on South Africa’s economic recovery, President Cyril Ramaphosa mentioned the word “implementation” no less than 15 times. Furthermore, it is worth noting that there has been some progress on reforms over the past year, seen in progress in the fight against corruption and state capture, the allocation of more spectrum and in changes at state-owned enterprises. Significantly, government is now discussing the possibility of public-private partnerships – a concept that it would not have been willing to even consider just two or three years ago.

In more good news, we received more pledges for foreign investment into the country at the last investment summit, which is the first critical driver needed to pave the way for better future economic growth. Additionally, South African retailers are reconsidering their use of Chinese or foreign manufacturers and have agreed to source more products locally instead. This is in keeping with a growing trend witnessed around the world as companies realise that they need to look beyond cost as the only consideration, and instead consider the environment, sustainability and their power to help grow local and developing markets. And against a backdrop of stronger global growth and a weaker US dollar, South Africa and other emerging markets look set to benefit as demand for our exports rises.

But while the positive global environment is currently being reflected in the rand, local bond markets and even on the JSE, it is important not to become complacent – South Africa urgently needs to face up to issues surrounding government spending and structural economic problems. We anticipate economic growth of between 3% and 3.5% this year, but this number is smoke and mirrors, reflecting a statistical base effect as the economy rebounds from a massive drop in 2020. Without reforms, this growth will be a one-off and the country will revert back to 1.5% growth – which we know from previous years is not enough to create jobs or address poverty and inequality, given that it mostly remains in line with the local population growth.


Upbeat markets aside, investors should consider that a number of risks remain on the table which could potentially cause some volatility when considering their short-term liquidity needs. First, markets seem to have decoupled from economic fundamentals, increasing the risk of a correction or pullback. Second, the fact that there is a vaccine doesn’t mean that the virus is finished with us yet – the effectiveness of the vaccine, the speed of roll-outs and logistical efficiency remain key concerns.

There is also the looming risk of potential global inflation on the back of the large amount of stimulus being pumped into the system. Additionally, as companies look to move manufacturing back home rather than choosing the cheapest option, supply shock looks set to feed into inflation over the next two to three years.

Much like diseases develop antibiotic resistance, we also face the risk of fiscal drag, as the effectiveness of fiscal stimulus in supporting economies and driving global growth decreases over time. Then, given the tendency of cheap money to end up in the wrong hands, there is also the risk of debt-related shock from companies and consumers, especially given heightened unemployment levels. There is already some evidence of this in the US, which has experienced a spike in mortgage delinquencies (although not to the extent of the 2008 crisis). Rising debt levels could result in the current economic and health crisis spilling over into a full-blown financial crisis.

And finally, the risk of geopolitical tensions is slightly more muted than in previous years, as Biden is generally more diplomatic than Trump, and may be able to heal some of the damage inflicted on relationships with allies and trading partners. However, some risk still remains as countries such as North Korea, which noted earlier this year that it is reconsidering its nuclear capabilities, remain extremely militant on the world stage.


In an environment like this, it is critical to build an optimal and diversified portfolio that is able to withstand a range of economic scenarios. Last year served as a stark reminder that life rarely follows a straight line, and that circumstances can change overnight. For instance, if anyone would have guessed at the outset of 2020 that markets would grow by double digits, they would have been right – but almost certainly for the wrong reasons!

But 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 that 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, as companies usually only make sustainable losses during extended recessions or depressions.

As previously mentioned, Biden is also expected to borrow heavily to extend support for the US’s social programmes, resulting in a softer US dollar, which should in turn support riskier assets. And with interest rates and the discount rate pushed to historic lows, cash and bonds hold little attraction for investors seeking growth, thus stimulating further demand and adding support to equity markets.

To understand this trend, it’s important to note that in a world of negative real rates, leaving money in cash in the bank is no longer “safe” in terms of achieving above-inflation growth. After all, given the amount of debt currently in the financial system, it is highly unlikely that central banks will normalise rates over the course of 2021. Instead, central banks are more likely to keep manipulating the short-end of yield curves, or to keep interest rates below inflation or close to 0%, in order to afford the debt generated by unprecedented fiscal stimulus.

The reality is that, given current yields, investors would need 900 years to double their cash investments, underscoring just how expensive cash currently is. Likewise, while US bonds – a traditional safe haven – do still offer some yield, as well as diversification benefits and protection, it would take just over 100 years for investors to double their investment in this asset class.

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. Gold presents such an opportunity. Cryptocurrencies can also serve as an alternative but heaped up sentiment is also currently contributing towards this asset class being disconnected from fundamentals. Additionally, given the lack of alternatives, having a core allocation in global equity markets still makes sense at current valuations in order to achieve portfolio growth in excess of inflation.


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 default or 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 also well positioned for a world in which the fourth industrial revolution is gathering momentum – companies that can innovate, add new technologies and potentially act as disruptors. Investors would therefore do well to consider investing with active managers and investment professionals who can help to navigate the difficult landscape, rather than simply just choosing passive investments.


In terms of the local market, it’s important to recognize that South Africa is currently lagging behind its peer group economically, and once the risk-on 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 those companies that offer some immunity against the local environment.

Investors should also bear in mind that while in the past the JSE has acted as a useful proxy for emerging markets, as more and more emerging markets become Asia-Pacific focused, they should consider adding other emerging market exposure to achieve true diversification.

Similarly, while the local bond market is one of the few in the world that may generate positive returns for investors in 2021, this should be treated with caution and investors should rather consider taking profits or even go underweight.

Bond yields were trading around 9% in March 2020 and, following the Moody’s downgrade to sub-investment grade, these yields exploded to 13% to compensate investors for the higher risk of government default. Since then 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.


The fact that the rand is trading below R16 to 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 will be the February Budget Speech. This is likely to remind investors of our poor local economic fundamentals coupled with the very positive current account tailwind of 2020 which is likely to turn into a headwind again this year.

Eventually, as investors wake up to South Africa’s economic reality, the rand will come under some pressure again. So, while the rand is currently enjoying the benefit of global tailwinds, it is likely to weaken during the course of the year. However, the extent of this weakening will ultimately depend on government’s progress on fiscal reforms, without which we could see the local currency head north of R18 to the greenback.