Investment Environment June 2021


COVID-19 vaccination progress

The number of vaccines administered worldwide continues to gather pace. 86 mil doses were administered at the end of January, 241 mil at the end of February, 574 mil at the end of March 1.2 bil at the end of April, 1.7 bil at the end of May and 2.7 bil at the end of June.  Significant progress has been made but the emerging markets have to catch up to achieve global “herd immunity” and put this virus into the history books.

The progress in rolling out the vaccine has allowed governments to lift restrictions in certain countries and we have seen a considerable rebound in economic activity. Both of these data points continue to provide support for a “risk on” environment.

Fiscal stimulus, interest rates and risk free rate

Last month we continued our focus on the movement in the US Treasury curve from 3 years out and the effect it is having on valuation of financial assets.  From the graph below you can see how the market is anticipating a marginal rise in short term rates (i.e. 1-3 years) and a moderation in medium to long term rates (i.e. from 7 years onwards) from a month earlier.  We have seen inflation spike largely due to the COVID 19 “base effect” of goods and services.  The Fed has stated that they view the spike in inflation as “transitory”, which is unlikely to lead to longer term inflationary pressures.  This view is largely reflected in the current shape of the US Treasury curve.


Indices performance (rolling cumulative five year returns in USD):

All indices, with the exception of Technology and Healthcare, were down in June.  The threat of a rise in longer term inflation has dissipated which is good for Technology valuations in general.  Healthcare continues to benefit from the tail wind of the COVID pandemic.  The S&P500 remains the best index to be invested in.

Earnings & Valuations


The recovery in the S&P500 companies that make up this index is expected to continue throughout 2021.  The graph demonstrates the actual recovery as well as the estimated earnings for the remaining three quarters of 2021.

The rebound in corporate earnings is the fastest recovery yet in the history of the S&P500.  We have commented previously on the earnings surprises once visibility returns in a post COVID rebound and how this, together with actual and estimated earnings, provides support for current valuations.

We continue to believe in maintaining our technology and healthcare exposures through the S&P500 and supplementing this with specific ETF’s to increase these weightings in the overall portfolio.  We have seen some recovery in the Clean Tech ETF as technology has re-rated.  The Lithium ETF is starting to create value in the portfolio as the underlying stocks start to benefit from a recovery in the price of Lithium as shown in the graph.

While all eyes were on the Fed the commodity cycle slowed in June having been super strong this year. This stall is probably temporary and a result of the interest rate focus, stronger USD and some interference from China in the markets by introducing supply from strategic stockpiles which was probably done to protect finished goods margins.


Global equity markets are “treading water” at the moment.  Actual and estimated earnings growth is supportive of equity valuations for the time being.  Whilst the market has factored in short term rates rising marginally this may well be deferred as the recent spike in inflation subsides and the COVID 19 “base effect” works its way through the system.

In South Africa, we have seen the ZAR:USD weaken from 13.75 to 14.29 off the back of global risk off sentiment and a stronger USD.  The positives driving the ZAR in the short term are: 1) positive real yield of approx. 4% on our Govt Bonds making them attractive to foreign investors despite our sub-investment grade rating 2) generation of actual trade surpluses over a number of quarters due to increase in mining exports and lower imports 3) improved tax recoveries by SARS.  In addition there appears to be some progress made in bringing the perpetrators of corruption to book which improves sentiment and confidence.  We have also seen some positive movement on policy changes with the cap of independent power production lifted from 1MW to 100MW.  This is a welcomed sign as its showing a marginal deregulation in the electricity generation market which is much needed. We still remain concerned about South Africa’s ability to implement further structural reforms required to drive growth, employment and tax revenue. 

For now equity investors can be cautiously optimistic.

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