February 2021 economic review
During the month the optimism over COVID-19 vaccinations overshadowed fears that a stronger-than-expected economic rebound could change the monetary policy trajectory. COVID-19 vaccinations continued at a steady pace in most developed countries, with approximately 140 million vaccinations being administered globally during February. To date in excess of 240 million have been vaccinated worldwide. Global COVID-19 related deaths dropped by around 25% month-on-month to 300 000.
Economic activity picked up in all major economies in February, though in most cases it remained short of end-2020 levels.
February was, however, another reminder of how swiftly things can change in financial markets, and the scale and velocity of the rise in US bond yields was painful for many market participants. A combination of factors, including inflation worries, contributed to a sharp and sudden steepening of the yield curve in February, and we saw bond markets sell off sharply.
During the month we saw investors shift their focus from the US Presidential Election and the social media trading frenzy, back to market fundamentals. Attention was centered on three key inputs, namely corporate earnings, economic data, and interest rates, all three of which influence longer-term stock valuations. Of the 88% of S&P 500 companies delivering fourth quarter results, 79% exceeded Wall Street expectations.
Economic strength was evident in January’s US retail sales, industrial production, and durable goods orders. However, the labor market remained stubbornly weak. The economic recovery narrative was sustained by falling COVID-19 numbers, as well as progress in vaccine distribution.
Economic data out of the UK showed that the economy was reduced to the size it was in 2013, as it declined by 9.9% in 2020. The contraction surpassed the 9.7% collapse experienced during the Great Depression, making it the worst annual drop since the early 1700’s.
Prime Minister Boris Johnson released a four-phase roadmap and this set an optimistic tone as it effectively aims ending lockdown restrictions on 21 June.
Unlike in the US, where the number of COVID-19 cases are declining, several countries in the Eurozone had to impose new lockdown restrictions to limit the spread of a new wave. At the same time, delivery and distribution of vaccines do not seem to be running efficiently. This will affect the economic outlook for the first quarter of 2021, especially the services sector.
Annual inflation in the region was confirmed at 0.9% for January and GDP was down by 0.6% in the last quarter of 2020.
During the month we saw China increase its efforts to disintermediate the US dollar from its commercial and financial system. This is contributing to the weaker US dollar and strengthening in other currencies. As the US is planning measures to shrink supply chain disruptions in critical goods, such as military and technology, China is fighting back by contemplating limiting exports of rare earth metals that are used by the US military and mobile telephones.
China PMI Services declined in January as new orders from overseas waned considerably, likely due to the deteriorating economic situation in Europe. In addition, new domestic orders also weakened, possibly as a result of the geographically isolated outbreaks of COVID-19 in China that required degrees of new economic constraints.
In South Africa, Finance Minister Tito Mboweni, delivered the 2021/2022 National Budget during February, setting an overall optimistic tone. Stronger than expected revenues and a commitment to aggressively cut expenditure over the medium term enabled South Africa to announce decidedly better fiscal projections in its annual budget. A currently strong mining industry and a faster-than-expected recovery in spending led to corporate tax and VAT collections surpassing expectations by R100 billion. Minister Mboweni was therefore able to avoid raising taxes to pay for the COVID-19 vaccine programmes.
The forecast for government’s peak indebtedness (projected for 2025-2026) was revised slightly lower (from 95.3% of GDP to 88.9% of GDP). Financial markets reacted positively to the news but the government will need to hit its targets if markets are to continue to perform well over the medium term.
South Africa’s unemployment rate jumped to a record high in the fourth quarter of last year. This means that 7.2 million people were unemployed, up from 30.8% in the previous three months.
There are signs of recovery, though. IHS Markit’s Purchasing Managers’ Index (PMI) rose to 50.8 in January from 50.2 in December, above the 50 level that denotes expansion for the fourth month in a row.
During the month the MSCI World bounced back from a rather slow start to the year, mainly led by cyclical stocks, driven by the vaccine roll-out in most developed countries and the hope that we will move back to economic normality. The MSCI World index returned 3.09% in rand terms and 2.45% in US dollar, for the month. Developed market equity markets managed to recover and closed the month on a positive note as the policy fears started to ease. Constraints on the supply of Covid-19 vaccines have meant that the roll-out has been much slower in emerging markets relative to developed markets. The Emerging Markets index posted relatively smaller gains over the month, closing at 1.36% in rand terms and 0.73% in US dollar. During the month traditionally defensive sectors, such as utilities and consumer staples, lagged, while sectors that are most sensitive to the economic cycle (such as energy, financials, and industrials) managed to performed well.
Local stocks produced a fourth consecutive positive monthly return, with the ALSI returning 5.87% for February. On a sector basis, resources delivered a solid return of 11.73% for the month, outpacing financials and industrials, which closed the month at 4.37% and 1.99% respectively. Listed property rose by 8.6% m/m, having matched the local equity market’s 40% rally over the past four months. SA bonds (ALBI) were rather flat for the month at 0.06% and cash (STeFI) returned 0.28%. The rand weakened by 0.62% against the US dollar, 0.53% versus the euro and was down a substantial 2.39% against the sterling.