posted on November 26, 2020 12:41
It’s hard to believe there is only a month to Christmas and this is our last letter for the year. How it has flown, with most of us accomplishing only fractions of what we had planned. At least we can spend the approaching holidays with our friends and families and can look forward to the new year in hope for something better.
There has been a flurry of political activity lately with elections in the USA and arrests of prominent figures locally. Although there is work still to be done on both scores, I get the feeling the heavy lifting has been done and things are moving in the right direction. It is going to be very interesting to see how the glaring political and societal divisions play out on both sides of the water. Equally interesting is the ongoing Brexit saga. That one is far from over too.
Markets are trying to fathom how Covid turns out, with volatility now largely swinging on the likes of whether vaccines are imminent or not. Thankfully recent news is positive in this regard. One thing is for sure, the world is itching to move on and I personally am excited to see what lies ahead.
As the world’s economy recovers, there are going to be permanent changes after Covid, with some industries affected more than others. There are new opportunities and even fresh industries may emerge. Certainly everything has been through a thorough examination and many have used the experience to re-imagine their business models and realign as they deem appropriate.
At this point it is clear that only the US and China can say they are coping on a socio-economic level. China is clearly ahead from a Covid case count perspective and, as a result, their economy is back to previous growth levels. America still needs to do more work on containing Covid, but their economy is also rebounding, albeit not as strongly as China. Their currency is in a weakening phase and commodity prices have risen due to the current risk-on sentiment.
This says to us that perhaps it is time for Emerging Markets (EMs) to shine for a while. This has started to manifest over recent months, with EM currencies strengthening against the $. The rand is the best performing of the lot, maybe because we were so hard hit after our downgrade to junk status. Stock and bond markets across the EMs have performed well, again with RSA the best so far.
These are still early days and there is a long way to go, but the prospects are improving. I hear daily of one money manager after another buying RSA Inc. for the first time in a long while. This includes foreigners who have started buying our bonds again as I intimated they might do in my last letter. Just in November alone, they bought $20 billion. That is a turnaround from being net sellers of up to $30 billion a month over the past 2 years and longer. This fuels rand strength and reduces bond yields which makes capital profits for us local bondholders. Long may it last!
Fund managers are reporting that their intelligence gathering shows a crop of good local companies weathered the Covid storm better than expected. Many are reporting excellent turnovers and, due to aggressive cost-cutting during lockdowns, their profit margins are strong. This bodes well for the resumption over time of dividend payouts at levels we saw before Covid, or even better. Long may that last!
The consumer seems to be more resilient than expected too. This may have to do with belt-tightening during lockdowns and increased discretionary income as a result of record-low interest rates. Whatever the reason, the consumer spins a large chunk of our GDP, so long may that last as well!
Adding this all up prompts me to say that the “green shoots” I thought I saw emerging are starting to take root. Risks remain, but barring unforeseen reversals or new obstacles, I feel it is fair to say that locally the next 5 years may be better than the last 5.
If that is the case, all our RSA assets will prosper. Our house prices, businesses, investment returns, you name it. Not before time, I say. But through all of that we must not repeat the mistake so often made in the past. This is to extrapolate into the future the fact that these newfound benefits will be there forever. Everything is cyclical and, just as we may benefit from this rotation, the one after will hurt us again. So while the rand is stronger, we need to keep externalizing currency (not as aggressively) at better rates to make sure we remain relevant when the rand weakens again as it inevitably does.
Thanks for continuing to choose Anfield, it is always appreciated. Look after yourselves and your loved ones and have a fabulous holidays.
More next time