2021 started with a bang and equity markets rallied across the world. South Africa outperformed the USA initially but is now falling behind, with the US markets hitting all-time highs almost every week. Europe is also outperforming us and the only laggard is China. The problem we have in South Africa is that certain sectors are performing very well, like the general retailers (+47%), but the commodities which led the charge initially are now stalling (+15%). We have to thank the high commodity prices for the strong rand and of course the R70 billion tax windfall earlier this year, which paid for the looting we endured.
The Chinese regulatory crackdown is still causing a lot of discomfort for Naspers (-20%) and Prosus (-22%) but there has been a nice rebound in some of the Chinese internet stocks like Alibaba, JD.com and Tencent. In the USA we are likely to see a tapering in the bond-buying by the Federal Reserve (Fed) soon. What this means is that the Reserve Bank in the US, called the “Fed”, will stop buying bonds issued by the Government, which they started doing to provide liquidity at low interest rates to stimulate the economy during the pandemic. The effect of this will be that bond rates will rise, which will take away some of the liquidity, which in turn will be negative for share prices. Sometimes the sell-off in shares due to the rising bond rates is called a “taper tantrum”, reminiscent of the behaviour of an unhappy two-year old.
So, looking forward, we might see that the punch bowl at the party is now empty and we might start suffering a slight headache due to our overindulgence in share-buying at elevated valuations. But not to worry, most of the companies we bought at high valuations will generate robust returns over the next few years, which will make them cheap again and our investment in them will be worthwhile.
