How will markets surprise investors this year?

Can global equity markets sustain the kind of prices they are enjoying now? This is the question many investors are asking. A lot of stimulus has been introduced on the macroeconomic side, and this is likely to continue in 2021. 

This environment is likely to be conducive to both economic and earnings growth.  

Looking further ahead, we are concerned about fiscal debt and how that will unwind over time. Governments have been borrowing from the future and at some point, this will have to be addressed.

In SA, markets could surprise investors. At PSG Wealth we know things are looking dire from a growth perspective, but it does seem that valuations are cheap and there is a significant opportunity for reratings. While confidence is low, this can change quickly. 

Our interest rates remain low and are likely to remain so for the rest of the year, while the monetary policy environment is conducive to a recovery. 

The big question, however, is about lockdowns and whether any stimulus that goes into the pocket of the consumer will ultimately reach the economy in an environment that is still riddled with uncertainty and lower confidence levels. 

Globally, the environment bodes well for equities given the amount of capital being pumped into economies. Global bonds, however, should be considered more carefully, and some pain is likely to be experienced down the line. 

Low cash rates globally and high amounts of liquidity will have inflation consequences, and therefore investors should consider their choice of asset class carefully. 

Equities not only offer good prospective returns, but also make a lot of sense from an inflation-hedge perspective.

Local equity sectors

Locally, commodities and financials offer attractive prospects. Financials were sold down along with other sectors from March to April last year, but unlike others, have not really recovered. Therefore, there is probably some performance potential as many financial counters are currently cheap. Commodities have done well but are still far behind their longer-term averages. With all the fiscal and monetary support around, we believe growth is on the cards and commodities could continue to do well. 

Bonds

SA bonds have been offering good value as an alternative to cash investments. 

In the US yields are low, and there is material risk. Therefore, migrating from a cash to a bond portfolio is not an obvious move as you might just end up with a negative return. Dividend paying bond-proxy types of stocks are doing well, but in SA we are fortunate that our bonds are yielding good returns. 

While there are significant risks to be mindful of, the probability of SA defaulting on bonds is low. 

There are many uncertainties around, but bonds still seem quite mispriced. If a default does not happen as expected, this asset class is set to reward investors handsomely.

The rand

A surprise last year was the relative strength of the rand compared with other currencies. As South Africans, we tend to obsess about the rand, but the forces that move the dollar are more powerful than those that move the rand. The rand is far more susceptible to movements in the US dollar. 

The dollar weakening in the wake of more fiscal stimulus has benefited the rand.

If, as seems likely, more stimulus flows into global markets, we might well see a weaker dollar and a stronger rand. 

However, with emerging markets there is always a chance of  negative surprises materialising and, for that reason, diversification remains important.

For more information, visit www.psg.co.za.

PSG Multi-Management (Pty) Ltd FSP 44306.

This article was paid for by PSG Wealth.