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Global Market Commentary – March 2021

Global markets continued their strong run as investors rotated into economically sensitive stocks that are expected to benefit from the expected surge in global growth as vaccines are more widely administered. This despite heightened fears of inflation in the US and new lockdowns being imposed in many parts of Europe.

In the US, Americans started receiving their $600 stimulus checks even as the US added 379000 jobs in February and the unemployment rate is expected to drop to just 4.5% by year end. The Federal Reserve reiterated its commitment to loose monetary policy saying that they are looking for an actual, sustained improvement in the economy (not forecasts) before considering tighter monetary policy. Many commentators were relieved that the Fed finally gave up on the notion of pre-empting inflation (i.e. raising rates before inflation rises) and has instead committed to allowing the economy to run hot if it helps achieve full employment. Fed Chairman, Jerome Powell, did however suggest that the Fed would cut back on support – through lower purchases of Treasuries and mortgage-backed securities – when the economy “has all but fully recovered”. President Biden meanwhile shared further details of the $2 trillion infrastructure spending plan that his administration will execute as they shift focus to bolstering the post-pandemic economy. The plan, which will be partly funded by gradually increasing the corporate tax rate from 21% to 28%, includes $621bn for transportation infrastructure; $400bn for direct care for the elderly and disabled; $300bn for improving drinking-water, internet and electricity infrastructure; $300bn for affordable housing and schools; and $580bn for investments into manufacturing, research and development in an effort to reverse the trend of outsourcing that has cost many American jobs.

China’s Premier Li Keqiang announced a target of above 6% for China’s GDP growth in 2021, well below the 8.1% forecast by the IMF, but analysts say that the lower target gives the government some room for structural reforms which may not yield immediate results.  The administration is also focusing on higher quality growth that will help the nation transition to a more mature economy. The resurgence of COVID-19 cases in the European Union has meanwhile quashed hopes of an economic recovery in that region as many countries institute new lockdowns in an effort to save lives. Vaccine programs in the 27-nation bloc are seven weeks behind schedule with only 15% of the population having received a vaccine by month end.

Developed markets outperformed emerging markets in March as rising interest rates in the US put pressure on emerging market flows. The 3.4% gain in global developed markets was driven by gains in financials, materials and consumer staples as oil- and commodity prices remained high and consumption was expected to soon return to pre-COVID levels, particularly in the US. The MSCI EM Index fell 1.5% as higher US yields made emerging market assets less attractive to investors. Chinese stocks in particular were sold off amidst fears that their US-listed stocks could be delisted after the US government passed legislation requiring increased disclosure. At the same time, the Chinese government is looking to reign in the power of technology giants like Alibaba and Baidu by establishing new anti-competitive rules.  Government bond yields rose across much of the developing world with the US 10-year government bond yield edging up to 1.75% at month end as investors priced in higher inflation expectations. As a result of rising yields, the Barclays Global Bond Aggregate lost 1.9% for the month. Global property stocks meanwhile rose 3% on the back of the re-opening narrative.

Portfolio Performance

The UWRF Global Portfolio lost 0.6% in USD last month (-3% in ZAR) vs. the MSCI ACWI return of 2.7% in USD (+0.1% in ZAR).

Baillie Gifford’s poor performance (-2.9% in USD) was the main contributor to underperformance but was partly offset by good returns from Vulcan (+3.7%) and Ninety One (+3%). Baillie Gifford’s performance was impacted by their high exposure to information technology stocks which lagged the market as well as their 15% exposure to emerging market stocks like Tencent Music (-23%), Meituan (-11%), Reliance Industries (-8) and (-9%).

Despite the poor performance for the month, the global portfolio’s one year return of +68.1% in USD (+39% in ZAR) remains 14% ahead of the global equity benchmark (and similarly ahead of peers).

April so far

It’s still very early in the month but it seems markets have again embraced the sector rotation trade as commodity prices remain high on the back of an expected recovery in global growth. The MSCI AC World Index and the MSCI EM Index are both up 2.3% in USD and the US 10 year bond yield has declined to 1.65%.

Global Market Commentary, March 2021