There are some factors that point to a rising probability of some pullback or correction in equity markets from the second half of 2021.
However, the massive policy stimulus and liquidity support still prevalent in the financial system, combined with rising profit levels, should limit the magnitude of any equity downside for now. Only as we move closer to expected US interest rate increases in 2023 do we think the downside risk for equity markets would become more pronounced. Therefore, we think the appropriate investment response to any potential near-term pullback or correction in global equity markets would be to remain invested or to ‘buy any dip’, in anticipation of a quick rebound.
Similar to the case for global equities, there is still strong fundamental profit support for the South African (SA) equity market. This has kept SA equity valuations in check and underpins attractive forward return expectations.
SA bond yields remain attractive against their own history, as well as relative to those in developed markets (DMs) and emerging markets (EMs). In the inflation-linked bond (ILB) space, near-term smaller monthly inflation accruals should provide less fundamental support for the asset class until 2Q22.
Property fundamentals remain weak, and valuations have become expensive after the recent strong rally.
Prospective SA real cash yields remain close to zero, making the asset class unappealing, in our view.
Global economic growth is supported by faster vaccinations in DMs, as EMs struggle to secure vaccines.
Demand for commodities continues to exceed supply, creating ‘perfect’ conditions for elevated commodity prices.
Consumer price inflation (CPI) is increasing globally on the back of a low base, commodity price increases and consumer behaviour changes. Indications are that the current waves of high commodity prices and CPI are transitory.
In the US, the transition path from current abundant stimulus via less monetary stimulus (‘tapering’) to eventual tightening will be formalised when the Federal Reserve members start talking in the coming months about the tapering of its bond purchasing programme.
Economic growth in SA is expected to surpass 4% this year, mostly due to a low base.
Reforms aimed at increasing electricity production have brightened the future economic growth outlook somewhat.
CPI is expected to have peaked in May 2021 and should trend downwards over the course of the year.
The rand exchange rate strengthened markedly to a level that may be considered as overvalued.
The repo rate is expected to remain unchanged in 2021, with two increases of 25 basis points expected in 2022.
To download the Market and economic outlook: July 2021 in PDF, click below…