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Ok. Got itHein Klee, Head of International at Nedbank Private Wealth looks at how international markets fared in January 2021.
The late-month turnaround was in response to growing concerns about the ongoing spread of Covid-19 spurred on by various mutations of the virus, a slower-than-expected vaccine rollout (especially in Europe), as well as speculation and potential asset bubbles (eg Bitcoin, Tesla and GameStop).
The violent mobbing at Capitol Hill that led to Trump’s second impeachment and the inauguration of Joe Biden as the 46th US president took centre stage. The start of the month also saw the Georgia Senate runoff, which gave the Democrats control of the Senate and completed the third leg of the Blue Wave. With the Democrats in control of Congress and the White House, the prospect of a significantly larger US fiscal stimulus package put upward pressure on government bond yields.
This rise in yields was only partially reversed after US Federal Reserve Chairman, Jerome Powell, reiterated the Fed’s commitment to an extended period of low interest rates and reassured investors that lessons had been learnt since the taper tantrum, when a sharp rise in bond yields upset all asset classes. However, taking away the punch bowl will be a much more difficult task than easing policy to its very limits. The taper tantrum and Powell’s attempts to raise US interest rates early in his tenure tell us a lot about how addicted markets have become to central bank largesse. Even though it is probably some way off, it’s hard to envisage an easy exit from these policies. Certainly, an early return to a more normal economic environment is a clear risk to financial market valuations.
Equity markets fell slightly (-0,5%) as measured by the MSCI AC World Index in US dollars. The best-performing regions were those that have better control of the pandemic, such as Asia (excluding Japan) (+4,1%) and emerging markets (+3,1%). UK equities (-0,2%) were supported by the region’s impressive start to the vaccine rollout, while Europe ex-UK (-1,8%) lagged as the EU vaccine programme was found wanting. The strongest sectors were stay-at-home communication services (+1,1%), healthcare (+1,1%), and energy (+1,8%), following a strong rally in the oil price. The weakest sectors included consumer staples (-3,9%), industrials (-2,5%), financials (-1,7%) and utilities (-1,2%). In terms of investment style, growth (-0,1%) outperformed value (-0,8%), while smaller companies (+1,9%) outperformed larger companies (-0,5%).
Within fixed income, the rise in government bond yields meant that higher-yielding corporate bonds, as measured by the ICE Merrill Lynch Global High Yield Index (+0,2%), outperformed investment-grade credit and safe-haven government bonds, with the Merrill Lynch Global Corporate Investment Grade Index down -0,8% and the JP Morgan Global Bond Index down -0,9% (all hedged to US dollars).
Commodities rose in aggregate with the Bloomberg Commodities Index, which was up +2,6%. Following the OPEC+ agreement relating to additional production cuts, crude oil (+7,3%) was the strongest commodity. Agriculture (+4,8%) was also solid on the back of supply concerns. In other areas, industrial metals (+0,0%) was flat over the month, while safe-haven gold (-2,6%) was the weakest sector, hindered in part by a stronger dollar and rising bond yields, which both increase the opportunity cost of investing in the precious metal.
In foreign exchange markets, the US dollar generally strengthened in January, outpacing the euro (+0,7%) and the Japanese yen (+1,4%), but not the pound (-0,3%), which benefited from the Brexit deal and the UK’s efficient vaccine rollout programme. Elsewhere, the US dollar was particularly strong against emerging-market currencies, such as the Brazilian real (+5,3%), Mexican peso (+3,3%), and the South African rand (+3,2%).