Investment Environment November 2021


COVID-19 vaccination progress

The number of vaccines administered worldwide continues to grow and is approaching 7.9 bil.  The table shows the total number of cases, recoveries and deaths worldwide since the pandemic started nearly two years ago.  Vaccinations continue to play a major role in limiting the number of hospitalizations and ultimately deaths.

The new Omicron variant, which was first reported in India in 2020, has made headlines in November.  There are three types of behaviour (“phenotypes”) that determine the threat posed by a new variant.  These are 1) transmissibility (rate at which it spreads); 2) virulence (seriousness of disease symptoms) and 3) immune evasion (degree of protection a person receives from a vaccine or natural infection).  The underlying genetics and evolutionary interaction of these three phenotypes are complex and unpicking them requires both detailed real-world clinical and epidemiological data and careful experiments in the laboratory. It will therefore be sometime before data can be produced to determine if the current vaccines (or new boosters) will provide the same, better or worse level of protection.  In the meantime, Governments around the world have acted quickly to try and limit the transmissibility by shutting down foreign travel.  This has come with much criticism by countries most affected – South Africa being one – as the impact on their economy is greatly affected.  For the time being a “risk off” approach is being factored into the markets with riskier assets incurring high levels of volatility.  We continue to monitor developments and have virtually no exposure to the travel and hospitality sectors, which are currently facing major headwinds unless these lockdown decisions are reversed in the short term.   

Fiscal stimulus, interest rates and risk free rate

The biggest factor driving markets at present is expectations of US interest rates and the probability of rates rising sooner than anticipated. However, The Fed wants to achieve full employment and inflation at 2% or higher for a period of time before considering interest rate increases. It’s worth unpacking how the US job market is developing as well as inflation.

The US job market continues to improve but the Fed wants to see a “full recovery” before taking steps to tighten monetary policy by raising interest rates. The October data shows that 255,000 jobs were created bringing the unemployment rate down to 4.6%.  The pre-COVID unemployment rate was 3.5% or 5.7 mil people, which is considerably lower than the current unemployment rate is 4.6% or 7.4 mil people.

The table shows the job losses have been felt by industry.  Leisure and hospitality make up the majority of losses and with the latest actions taken by Governments around the world, this sector is likely to remain significantly below pre-COVID levels.  The Fed is therefore likely to continue playing a “wait and see” game before acting despite the threats of inflation becoming a medium term issue.

Inflation continues to climb across most developed countries with the US feeling the highest impact.  Global supply chains continue to suffer bottlenecks; energy and gas prices have also risen, particularly in Europe.  Demand pull inflation seems to be the major driver and Central Banks are very wary of not acting appropriately.  Whilst the Fed is likely to play a wait and see game, other Central Bankers have indicated they may act sooner.

In summary, the Fed will commence with its asset tapering program (reverse of quantitative easing) in December, which will reduce monetary stimulus injected into the financial system since the start of the pandemic.  The Fed is also unlikely to reassess its interest rate outlook until more factual data is forthcoming on the Omicron variant and its impact on industry.

The US10Y yield – or global risk free rate – has remained fairly stable in November decreasing from 1.55% in October to 1.52% in November.

The curve is largely pricing in a slower short term trajectory, which aligns to a “wait and see” approach that we subscribe to.


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

All market indices retraced for the month, with the exception of technology.  The S&P500 (-0.7%), Technology (+3.1%) and Healthcare (-3.5%). On a regional basis, Europe (-4.8%), UK (-5.0%) and Emerging Markets (-4.0%) also retraced for the month. Corporate earnings surprises continue to prevail across all global markets.  The emergence of the Omicron variant has caused much panic and has largely been responsible for the pull back in markets and a temporary “risk off” stance.

Earnings & Valuations

United States

The graph shows that actual Qtr3 earnings relative to analyst forecasts on 30 Sep 2021. Actual earnings have surpassed all analyst predictions across all sectors.  The S&P 500 grew earnings by 39.6%, which continues to provide support for equities.

The graph provides an overview of forecasted earnings growth for the full year 2022. Earnings growth is looking to slow on average for the S&P500 to 8.7% (2021: 44.9%). Whilst the slow-down in growth looks dramatic, it’s a relative measure to the preceding period. 2021 growth was off a low base due to the full impact of COVID; 2022 is off a full recovery in earnings. With the exception of financials and materials, the majority of the industries are looking to grow at rates well above inflation.

The graph provides a relative valuation between equities (S&P500) and bonds by looking at their forward yields (i.e. dividends in the case of equities and interest in the case of Treasuries). Corporate earnings by S&P500 companies continue to do well and payout ratios (of earnings) provide for attractive dividend yields relative to other asset classes.  Equities will continue to garner support as long as earnings continue to grow and payout ratios continue to produce yields well in excess of cash and bonds.


The graph shows the recovery in earnings across Europe using the Eurostox600 index.  The recovery for Qtr3 is projected to be 58.8% followed by 52.3% for Qtr4.  Thereafter, growth moderates to between 9%-15%.  Whilst the recovery is off a low base (i.e. relative to 2020) it looks sustainable at rates well above inflation.

The graphs show the relative valuation differential between the % price and earnings movement of the Eurostox600 and S&P500.  One can see that European equities are more reasonably priced than US equities.  There are a number of reasons for this.  Post the global financial crises (2008), the US implemented quantitative easing whereas the European Union implemented austerity measures.  The former enables economies to effectively trade out of their problems, stimulated by monetary stimulus, whereas the latter looks to cut costs and reassess before resuming growth.  The market continues to reward growth and will likely do so if and when things turn.

Thematic themes to augment portfolio construction

The transition to a cleaner and greener economy has gained a lot of focus over the past couple months.  The COP 26 UN Climate Conference took place from 31 October to 12 November.  The focus was to accelerate action towards the goals of the Paris Agreement and the UN framework on climate change. 

The graph shows the reduction in the cost energy produced by renewables over the last decade.  The further adoption of renewables to generate energy in the global economy is likely to accelerate as the cost is comparable (and in some cases cheaper) than coal fired energy.  Governments around the world will continue to support this transition and in some cases force increased adoption in order for them to meet their climate goals.  We have introduced a Clean Energy focused ETF (solar, wind, pump hydro and hydrogen) to gain exposure to this theme.

Electric Vehicles (“EV”) continue to gain prominence as the world embarks on a transition to cleaner transportation.  The first graph provides context.  This shift is evident from a market perspective where there is a drastic difference between EV market capitalization and traditional automobile companies, despite the major difference between actual vehicle deliveries (graph 2). The majority of EV’s use batteries, where Li-Ion is one of the key metals.  The  third graph shows the price of Lithium Carbonate.  The price increase is driven by demand.  The fourth graph shows the growth in adoption by a large consumer, i.e. Tesla.  The operational execution of vehicle deliveries is phenomenal.  As other EV companies start to deliver in the quantities anticipated the demand for Li-Ion is likely to continue for many decades ahead.  We have introduced an ETF that gains exposure to the Li-Ion value chain – from mining, manufacturing and consumption.


Global equity markets were “spooked” by the Omicron variant and the unknowns that it brings for the time being, causing volatility in the market.  The primary concern appears to be Omicron’s many mutations, which could impact current immunity (through vaccine or previous infection) and drive a need for a new vaccine.  One will have to see how this plays out in the coming months and how Governments react to limitations and lock down of economies and sectors.   Corporate earnings, however continue to deliver and in most cases surprise on the upside.  The Fed is likely to play a “wait and see” game whilst new data starts to emerge on the efficacy of vaccines to this new variant.  Dividend yields and corporate earnings continue to support equity valuations for the time being.

In South Africa, the provincial elections are now a thing of the past.  The ANC were the big losers, which is no real surprise given the manner in which they have managed the country over the years.  The DA has managed to secure a number of the key metros, with the exception of eThekwini.  The DA, itself a minority, has managed to receive the support of other minority parties to remove the ANC.  Time will tell how these “coalitions” will work in meeting the expectations of the people.  The SARB raised interest rates by 25 bp in November.  This is the first increase in rates since June 2020.  South Africa is not immune from inflationary pressures like those being experienced in developed markets around the globe.  The inclusion of South Africa on the red list of many foreign countries has been an extremely unfortunate event.  Tourism plays a major role in our economy and with the latest restrictions the hospitality, leisure and tourism industries will find it difficult to recover without the support from Government.  The ZAR has weakened to above 16 to the USD as a result.    

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