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The Valuator | The Acorn Brief - February 2021

The Acorn Brief – February 2021

Volume 19 Issue 1– February 2021


The rolling out of Covid-19 vaccines across the world has brought renewed hope that the pandemic will be brought under control, lives will normalise and economic activity will return to pre-pandemic levels. The resurgence of Covid-19 infections has seen many countries imposing stricter lockdown measures to curb the spread and take the pressure off healthcare systems struggling to cope with the higher numbers of hospitalised patients. Successful implementation of vaccination programmes will see a decline, and hopefully progress towards eradication, of the Covid-19 virus during the course of this year. The challenge is always going to be about some kind of equitable access to vaccines with wealthier countries likely to be at the front of the queue. South Africa has received its first batch of vaccines and we must hope that government and the private sector work together to ensure that large parts of the population receive vaccinations in as short a period of time as is reasonably possible. Without an effective implementation of vaccinations, economic activity is going to be hindered. It is also a reality that it is going to take time for economic activity to normalise and some sectors such as tourism, hospitality and travel will take longer to recover. We have also seen shifts in consumer behaviour and buying patterns and some of these shifts will become permanent. Covid-19 has moved the digital era forward at a much faster rate than would have been the case and that is a permanent shift. This will result in some businesses adapting and moving with the shift, but some will not.

January saw the departure of former US President Donald Trump and the swearing in of new US President Joe Biden. As could be expected, Trump’s departure from the White house was not without controversy and drama as his supporters invaded Capitol Hill and the US Congress in protest against the outcome of the election. This event shocked the nation as it was seen as a rebellion against US democracy. President Biden was inaugurated under heavy security and with no crowds attending due to Covid-19 restrictions. He has wasted no time overturning many of former President Trump’s Executive Orders, most notable of which was the USA re-joining the Paris Agreement which is a global accord signed in 2015 to deal with climate change and global warming. President Biden has the challenge of getting the USA back to normal levels of economic growth and at the same time uniting a very divided country. America’s position as the largest economy in the world is going to be overtaken by China in the next few years which is much sooner than was expected it would happen. When the USA is no longer the largest economy in the world, it will be interesting to see the

manner in which it seeks to maintain the position of influence and power that is it currently has in global affairs. The USA will always be an important player in global financial, economic, and political matters, it just may not be as dominant as it has been in the past.

Global equity markets started 2021 continuing the upward trend that was in place towards the end of 2020. US markets have continued to reach new highs in early February after a relatively quiet January and markets in the east have all had a positive start to the year. The JSE All Share index has also reached new highs driven largely by a strong resource sector and Naspers. The broader market SA equity market is still well down on where it a year ago. Market valuations in the US markets are very high by historical standards but against a backdrop of very low interest rates and the significant impact of government stimulus packages investors are prepared to look past the current weak economic fundamentals and remain invested in spite of the stretched valuations. By contrast the SA market which has generally lagged world markets is felt by a number of commentators to be undervalued. The outlook for SA economic growth remains uncertain but there are two key drivers that will help to get an economic recovery underway. They are the agricultural and mining sectors of the SA economy. The agricultural sector is benefitting from good rainfall in most parts of the country and the mining sector from a positive commodity cycle. The contribution of mining to the overall SA economy has shrunk but it is still a very important sector of the economy. If both of these sectors do well it has significant impact on the overall economy and economic growth. This is much needed after the recent lockdown restrictions that shut down the alcohol and tourism sectors of the economy and also impacted on the hospitality industry.

The year ahead does bring some hope of an improvement and normalisation. There will be market volatility and possibly at times turbulence. This may provide opportunities for investment but until there are clear signs of a broader global economic recovery, market risk must be monitored. One of these risks is the level of retail speculation that is currently evident, particularly in US markets. The recent events where speculative day traders took on short selling hedge funds is clear evidence of this. Shares of companies that were struggling or in some cases on their out of business were pushed to historically high and unrealistically priced levels by a group of retail day traders who forced short selling hedge funds to buy in stock that they had sold in anticipation of the share prices falling. In the past retail speculation has been a warning. It must be watched.

Twinoaks Investment Management (Pty) Ltd (Twinoaks) is an FSB approved Discretionary Financial Service Provider – No 849. This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Twinoaks has based this document on information obtained from sources it believes to be reliable but which it has not independently verified. For any further information concerning this publication, please contact Twinoaks