When Pfizer announced that the vaccine it had developed in conjunction with BioNtech was over 90% effective, equity markets around the globe cheered. Positive news surrounding the vaccine sent global stock prices considerably higher as evidenced by the MSCI All Country (AC) World Index ending the month 12% higher. Looking back at over three decades of returns data, this has been the single largest monthly increase in the global index over that period.
Unlike the recovery we saw earlier in the year which was predominantly driven by the pandemic beneficiaries, specifically “Big tech” stocks (Alphabet, Amazon, Apple, Facebook and Microsoft), this time the rally was backed by stocks that fall into the “return to normality” bucket. Stocks that fall into this category include cyclicals (stocks whose items or services are strongly correlated to the economy namely industrials and banks as well as stocks that were at the epicentre of the Covid storm such as hotels, restaurants, airlines and cruise ships) and energy stocks (oil and natural gas). During the month the MSCI AC World indices for industrials, banks and energy stocks returned 21%, 16% and 26% respectively.
The rotation we have seen has been more than sectoral having been consistent across both style and size. As a point of reference, style refers to growth and value stocks while size refers to market capitalisation with stocks generally split between large capitalisation (large caps) and small capitalisation (small caps). From a size perspective, small caps outperformed their large cap counterparts with the MSCI AC World Small Cap Index returning 15% during the month. In terms of style, value has underperformed growth since the global financial crisis but the recent outperformance of the MSCI AC World IMI Value Index against the MSCI AC World IMI Growth Index could signal a potential reversal in this long-term trend.
A common thread that runs through cyclical, value and small cap stocks is that they tend to perform well when an economy is expanding, bond yields are rising and the yield curve is steepening. To this point economic data continues to show signs of improvement, albeit off a low base and yields on US treasuries have begun to rise with longer-dated treasuries rising at a faster pace leading to a steepening of the yield curve.
Whether the change in leadership across sector, style and size will be sustained remains uncertain. Many of the stocks that have begun to outperform, especially those ravaged by the pandemic, have been left with balance sheets that are far from healthy. The vaccine itself does not repair the damage that has been dealt to economies and there is still uncertainty as to how the vaccine will perform once rolled out on a massive scale. Surprisingly the adoption rate for the vaccine may not be as high as one might expect with many concerned about the long-term health effects of taking an untested vaccine. It is also worth pointing out that a shift in leadership away from Big tech does not spell the end for these stocks. The pandemic saw an acceleration in many structural trends (growth in e-commerce) as well as an emergence in new trends (working from home) which can only be viewed as a positive for the tech giants.
Regardless of where future the leadership may lie, interest rates remain depressed (especially short-term rates) which will force investors to continue to search for yield in equity markets. Combine this with the recently proposed $908 billion stimulus package by US senators and it appears conditions will continue to be favourable for equity markets. Of course this will spark a debate among investors about the future prospects of gold. Investors appear to be betting on a return to normality preferring stocks over the yellow metal which has led to the price of gold falling below the $1,800/ozt level, a decline of 5% for the month.
Lurking in the background however is the possibility of rising inflation stirred up by the massive amounts of stimulus unleashed by governments. The latest proposal in the US would add to its already ballooning balance sheet which has almost doubled in size in less than a year. This may spark concerns in some over the future strength of the US dollar which may see investors return to gold as a safe-haven.
Perhaps it may be driven by the excess liquidity stemming from such stimulus packages or could it be that investors have become more accepting of it, but Bitcoin has experienced a meteoric rise since the onset of the pandemic and year-to-date is up 170%. Regarded by some as an alternative to gold as a safe-haven asset many, including institutions, are turning to the cryptocurrency as it continues to gain acceptance in the investment community.
Our local equity market followed suit with its global peers as the JSE All Share Index closed out the month 10% higher. The equity rotation into cyclicals led to a 19% rise in the JSE Banks Index, South Africa’s primary energy stock, Sasol, rose 44% during the month and the JSE Industrials Index closed 20% higher. Keeping in line with the global trend, the combination of a weaker gold price and stronger rand saw the JSE Gold Mining Index decline 18%. Despite the country’s budget deficit rising above 10% of its GDP and expectations of it reaching 15% in the not too distant future or the government’s debt rising to near 80% of GDP also projected to increase to 95% over the next few years the country’s exchange rate has strengthened considerably against the US Dollar breaching the $16 level to end the month at $15.48 against the greenback.