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January 2021 economic review

November economic review
| Market Forces

International highlights

Democracy prevailed on 20 January as Joe Biden became the 46th president of the United States. He is joined by the 49th vice president of the United States, Kamala Harris who is the first woman and the first African American to hold the post. During the run-up to Biden’s inauguration, a crowd of Republican supporters stormed the political headquarters of the US, Capitol Hill, where lawmakers confirming Biden’s election victory were forced to take shelter. The subsequent chaos left five people dead and resulted in former US President Donald Trump becoming the first US president to be impeached for a second time.

The lengthy US political season concluded with run-off Senate elections in Georgia delivering Democrats the two seats they needed for control of the Senate. Investors expecting more fiscal stimulus with Democratic control of the Senate drove US 10-year government bond yields above 1% for the first time since the pandemic started.

Since the inauguration Biden has already signed 17 executive orders on topics ranging from the Coronavirus, immigration, the economy and the environment. Nine of those executive orders are reversals from Donald Trump’s policies such as rejoining the Paris climate accord, halting construction on the border wall and removing the US entry restrictions for passport holders from the seven Muslim-majority countries.

In the US, GDP declined 2.5% year-on-year in the last quarter of 2020, while overall growth for 2020 fell 3.5%. This was the largest contraction since 1946, but still better than what was forecast during the early days of the pandemic last year. At its January meeting, the US Federal Reserve (Fed) left rates and its bond-buying programme unchanged. It was however noted that ‘the pace of the recovery in economic activity and employment has moderated in recent months’.

The relatively slow roll-out of Covid-19 vaccines led the headlines in Europe. Also knocking sentiment was political turmoil in Italy that led to the resignation of Prime Minister Conte. The European Commission’s consumer confidence survey fell by 1.7 points compared to December.

In the UK, the roll-out of vaccines gained momentum but lockdown restrictions weighed on economic activity. The composite purchasing managers’ index, a measure of service and manufacturing sector activity, fell to 40.6 in January from 50.4 in December (a reading below 50 indicates contraction).

China released its 2020 GDP figures. Its full-year growth came in at 2.3% year-on-year (y/y) in real terms excluding price fluctuations. Even though positive growth during a world pandemic is admirable, this is China’s lowest growth figure since 1976.

Local highlights

At the start of 2021 South Africa reverted to level 3 lockdown restrictions, prohibiting access to alcohol, beaches, and parks for January and the start of the government school year was pushed out to February. These restrictions appear to have helped the country move past the peak of its recent second wave COVID-19 outbreak.

As South Africans awaited details on their vaccine rollout programme, local stocks managed to string together a third consecutive positive month for the first time in two years, with the local market rallying by 20% since the end of October 2020, to claw its way back above pre-pandemic highs.

Average annual consumer price inflation (CPI) for 2020 stood at 3.3%, the lowest annual average rate since 2004 (1.4%) and the second-lowest since 1969 (3.0%). December annual inflation progressed to 3.1% y/y (vs 3.2% in November), while m/m price growth was 0.2% vs 0% in November.

The governor of the South African Reserve Bank, Lesetja Kganyago, issued a statement at the Monetary Policy Committee (MPC) meeting, stating that the repo rate will remain unchanged at 3.5% per annum. The statement also highlights the positive outlook for global growth for 2021 due to vaccine roll-outs. However, domestically, growth is slowed by the uncertainty around the vaccine roll-out, weak investment and a constrained supply of energy.

International markets

January saw divergent performance for shares, with developed market equities ending the month lower while emerging market equities posted positive returns. The solid gains during the end of 2020 seemed to carry through to the start of 2021, with the first week of January showing major markets all in positive territory year to date (YTD) as the US extended its bull run. However, by the second week of the month we saw markets move to a downward trend and, with a lot of good news already priced in, the month ended on a slightly more somber note relative to its start. While positive sentiment around the various COVID-19 vaccine rollout projects initially lifted share prices, there have been ongoing concerns about the pace of global vaccine roll-outs, the level of supply, as well as its effectiveness due to the emergence of the various new COVID-19 variants. Enduring lockdowns in the UK and parts of Europe added to these concerns.

The MSCI World Index returned -0.99% (USD) on a month-to month basis and its emerging market counterpart (MSCI EM) returned 2.99% (USD). The S&P 500 took a small dip with a month-to-month return of -1.02% (USD). In the UK, the FTSE 100, having lagged throughout 2020 (-14.3% y/y), played catch-up in early January as the Brexit trade deal removed uncertainty surrounding trade relations between it and the EU. However, after 8 January the FTSE 100 trended downward, finally ending the month 0.8% lower.

Major European markets also closed in the red, with the region’s largest economy, Germany’s DAX, down 2.08% m/m, while France’s CAC dropped 2.7% m/m. On the economic data front, the French economy contracted by less than expected in the last quarter of 2020 amid its second COVID-19 lockdown, with GDP coming in at a negative 1.4% vs the Reuters consensus forecasts of a 4% contraction. Following a decade of growth, Germany’s full-year 2020 GDP shrank by 5%, as lockdowns hit businesses and consumer activity.

In China, the Hang Seng rose 3.9% m/m, while Hong Kong’s Shanghai Composite Index closed January 0.3% higher. The Nikkei 225 closed at 0.8%

Local markets

The FTSE/JSE All Share Index rose for a third straight month and closed the first month of the year with a return of 5.21%.  On 25 January, the index surged past the 65 000 mark for the first time, before waning to end the day just below that mark. On a sectoral basis, Basic Materials, Industrials and Financials returned 4.98%, 4.15% and -2.60% respectively. Property stumbled on the 2021 starting block as the SAPY returned -3.21% on a m/m basis. The ALBI returned 0.76% and cash (STeFI) returned a mere 0.28% for the month.

The rand weakened against the US dollar, pound sterling and the euro at -2.42%, -2.86% and -1.72% respectively on a m/m basis. In contrast, the rand strengthened against the Japanese yen by 1.40%.

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