Year in review
We will remember 2020 as the year COVID-19 dramatically impacted our lives. Portfolio manager Mike Townshend looks at the year that was.
Most investors will happily bid farewell to the tumultuous 2020. The harsh lockdown and border closures hit South Africa hard. Millions sustained income reductions while many businesses suffered liquidation or took on more debt. We adopted new work practices, different ways of socialising and learned a new meaning to the word zoom. Too many of us suffered the loss of loved ones and we pass on our heartfelt condolences to those who may be grieving.
But it hasn’t all been bad news. Inflation rates and interest rates are at multi-decade lows, some asset classes performed well and US voters overwhelmingly backed change from Donald Trump’s divisive presidency. The Foord unit trusts performed credibly with investors in the multi-asset funds enjoying inflation-beating returns despite massive economic recession. Let’s investigate why this happened and delve into some of the year’s notable events.
Unexpected shocks to the global economy inevitably cause volatility across asset classes. Within a month of COVID-19 spreading from China to the West, global equity markets, including the JSE, collapsed by around a third on expectations for severe economic contraction. Economists expect the global economy to have shrunk 3% in 2020 with South Africa’s GDP set to decline 8%.
The US government responded quickly, pumping $2 trillion directly into the hands of American consumers. It announced another $900 billion stimulus package in December. The EU delivered close to $1 trillion to support its economies, while the Japanese and Chinese authorities also gave significant aid to business and consumers. Indeed, most countries did something. This global stimulus dwarfed all earlier intervention, including that of the 2008/2009 Global Financial Crisis.
This cash quickly found its way into financial markets, given the alternative of holding cash at zero or negative interest rates. The massive fiscal and monetary spending by the world’s leading economies thus ignited a price rally on world stock and bond markets. By year-end most global equity markets had rallied to recoup earlier losses, with some achieving all-time highs. Developed market bourses gained 15.9% and emerging markets 18.3%, while the World Government Bond Index advanced 10.1% (all in US dollars).
The downside of this stimulus is the high levels of government debt. It is difficult to see how governments can sustain such debt levels even if interest rates stay close to or below zero. Governments cannot borrow indefinitely and they must at some point repay debt. In last quarter’s Foreword article, Inflation — The Biggest Destroyer Capital, my colleague William Fraser discussed the risks of rising debt and global inflation on the investment landscape. We remain vigilant against these potential threats.
The JSE All Share Index also recovered from its March lows, closing up 7.0%. Index heavyweights Naspers and Prosus (which make up almost 20% of the index) pulled up the bourse, advancing 32.1% and 52.6%. However, the general retail sector declined by 15.4%, financials by 19.7% and the property sector lost a third of its value. These are all mostly SA-centric sectors, reflecting the lockdown’s massive economic effect on our economy. Resources advanced 21.2%, with the gold sector rallying 36.5% as investors sought gold’s safe-haven qualities.
Currencies were also volatile. The rand collapsed 36% against the US dollar to R19.11/$ before recovering to close 5.0% lower at R14.69/$ as investors sought out emerging markets and high-yielding debt. The dollar was weaker against the other majors.
Commodities reflected the economic uncertainty with the oil price plummeting during the crisis before recovering to close 22% down—US oil markets even briefly traded at negative values as oil inventories soared. In contrast, market uncertainty led to a run on precious metals with the gold price up 24%, silver up 47% and palladium up 29%.
Dr Copper surged 26% to lead the recovery of the base metal suite. The red metal’s price rally bodes well for future economic growth, although it partially reflects rising demand by renewable technologies such as wind farms and electric vehicles.
SA bonds were amongst the best performing asset classes, shrugging off the March junk-status ratings downgrade. The All Bond Index posted a gain of 8.7% as borrowing costs trended lower after the SA Reserve Bank lowered the repo rate to a record 3.5% low during the year. Bonds in the 3–7 year maturity bucket performed best, returning 16.3%.
Some basic investment principles have served Foord’s investors well over the past year. Firstly, diversification allowed the multi-asset class funds to spread investment risk across a range of asset classes, geographies, sectors and currencies. This contributed to the excellent performance of the Foord Conservative, Foord Balanced and Foord Flexible Funds compared to peers and the opportunity set.
Secondly, patience and not panicking at the point of greatest COVID-19 pessimism allowed the funds to participate in the full recovery of equity markets. Finally, sticking to the strategy to favour better-quality companies with more reliable earnings streams and management teams capable of navigating difficult economic circumstances helped avoid the biggest lockdown losers.
We look forward to a less volatile 2021, but are positioned cautiously given the prevailing COVID-19 and geopolitical risks, as well as high market valuations abroad. Uncertain and volatile times create opportunities for the flexible investor to take advantage of market mispricing. The fund managers capitalised on such opportunities at the margin in the South African market but more aggressively in the Foord Global Equity Fund—which dramatically outperformed its benchmark last year.