From the desk of our CIO

March 2021

The 1st quarter of 2021 continued the positive momentum in equity markets as participants embraced the vaccine roll-out and easing monetary conditions. Whilst domestic equity markets generated 13% (J403) over the quarter other assets such as SA bonds delivered muted returns -1.7% and MSCI world at 5% with a stable currency. Against a backdrop of easing monetary and fiscal conditions as well as a FED Reserve content to watch inflation trend higher than its 2% target, it should not surprise market participants that riskier assets are being pushed higher. Lower for longer rates should not be confused as a signal to assume risk at any cost, beware mispricing risk and assuming linear relationships.

Recent hedge fund implosion, Archegos Capital Management (a family run office by Bill Hwang) is estimated to cost global investment banks around $6bn in losses. Whilst the stronger capital and regulatory framework, post the implementation of Basel III, has muted the effects on the banks, it does indicate the risk appetite may be too aggressive and portent greater risk ahead. A few months later and we have Chinese distressed asset manager, Huarong Asset Management, failing to file financial statements which sparked concerns on its bond repayments. The Chinese Authorities had to step in to calm market participants anxiety but it does raise questions around imminent debt risk across various geographies.

Whilst we remain positive on SA equity and Bond returns, longer term we are cautious. In the near term as valuation levels seem rather elevated and the “buy the dip” mentality may be masking underlying financial risk, which are slowly spilling over in certain areas. Developed markets have had phenomenal returns over the last 10 years but the rebound in 2021 GDP might be a once off and all the stimulus pumped into development markets may have brought forward growth rather than reset growth on a higher path. We remain constructive on emerging markets (selectively) over developed markets as the risk and return profiles appear more balanced.

To quote Warren Buffet, “be fearful when others are greedy and greedy when others are fearful”. At the moment it seems, at least to us, “greed” in markets are the order of the day and any retracement is a buying opportunity, until such time as it becomes a correction.