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Performance for the month of April was dominated by the reflation trade; a look into inflation coming back due to the trillions of dollars pumped into the global financial system as a means of saving it from the devastating effects of the Covid-19 pandemic. We saw commodities run up as the market perceived inflation to be running away, pushing the local commodity sector and lifting the Johannesburg Stock Exchange (JSE) which contributed to the MSCI World going up 4.6%. The Property sector outperformed the whole of the JSE with an increase of 11.48% whilst we came in at 11.08%, on the back of taking profits too early. The table below shows our performance and critically how we have been able to beat the benchmark for the year so far.
Global Market Themes
Global equities rallied across the world as the vaccine rollout, specifically in the western hemisphere, picked up in pace as pandemic cases collapsed in the U.S as President Biden pushed ahead, working on achieving his promises for the 4th of July. Investors believe that the inflation threat will prompt an early response from the Federal Reserve of the United States to act against inflation. However, markets were disappointed to see how the Federal Reserve responded with rates being unchanged, even though the market piled on pressure towards the Fed. The temporary increase in inflation was not enough for the Federal Reserve to act and the institution sees the minor spike as a result of the reopening of the economy and not an indication that the US economy has fully healed. This was confirmed with the disappointing jobs data for April where financial markets expected 1 million jobs to be created yet only 266,000 jobs were created. This was accompanied with the revision down of March jobs from 916,000 to 770,000. Hence, the Fed has maintained its ultra-easy policies.
Specifically with jobs, President Biden pushed ahead with the $2 trillion infrastructure package which will create jobs and address climate change concerns for the country as it wants to be the world’s leader in climate change and maintain its lead in technology. Biden is also scheduled to announce the $1.8trillion spending package focused on education and worker benefits. Meanwhile the Eurozone has also increased its vaccine rollout program, but at a slower pace. The UK has maintained its lead in vaccine rollout along with economic data such as purchase managers index at 60points whilst continental Europe has struggled. This has been reflected in Europe’s gross domestic product which saw a decline of -0.6% for the quarter, after a -0.7% decline in the previous quarter, putting the Eurozone in a technical recession. However, European companies have been beating estimates in reporting recovery earnings contrary to expectations based on GDP.
China’s GDP surprised the world as it reached a record of 18.9% for the quarter, the highest since 1990. This is a result of successfully implementing a vaccine rollout, the bouncing back of the economy and the bouncing back of exports for the globe which wants Chinese products due to the world’s factories stalling. The economy is projected to exceed 8% for this year as it sees a surge in growth figures such as retail at 17.7% and fixed asset investment at 21% in the last month. However, ruling Communist Party leaders noted that the recovery is uneven and not solid.
South African Themes
South Africa was a recipient of investment flows as the Rand strengthened to R14.51 against the US Dollar as commodities continued to rally bolstered by the inflation debate. Subsequently, consumer price index for the country came in hotter than expected for April at 3.2% year-on year, beating expectations. Meanwhile, the South African government reignited the deadlocked public sector wage talks with unions. The ruling party pushed ahead with the Step Aside policy that saw Ace Magashule being suspended from the party and other potential party members also being highlighted due to corruption charges. This is part of the “clean up” that President Cyril Ramaphosa had envisioned. A point of interest has been the resilience of the market against all the political news where the JSE was up 0.97% for April, with property sector leading the charge at 11.4%
The property sector led the recovery with a 11.4% performance for April as the Rand strengthened in a risk-on environment. This is contrary to the March reporting season with companies reporting poor results, reflecting the dire situation on physical property. There’s definitely a disconnect from listed property and direct property and this has mainly to do with the valuation. Listed property still trades at a ~30% discount to NAV and this is the primary driver of recent performance, the undervalued nature of listed property. What has been positive is the return of the work force to offices and the return of higher income earners to Super Regional Malls, a phenomenon witnessed at Sandton City by Liberty Two Degrees. All of these factors have raised the interest in the sector, and we anticipate that other equity managers will flock back to the listed property sector, as its metrics improve along with the cheap valuation of the sector. We still hold our assertion that listed property will be up by more than 25% for 2021.
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