Investment Environment October 2021


COVID-19 vaccination progress

The number of vaccines administered worldwide continues to grow but at a slower pace. The table shows the absolute number of vaccines administered worldwide, which is approaching 7 bil; the table on the right shows how various countries are either progressing or stagnating with the administering of vaccines. Reasonable progress continues but there are a number of countries that have stagnated due to numerous reasons. The latest information indicates that Asian and Latin American countries are steadily increasing their vaccinations and are poised to overtake the western world. It is likely that this is due to vaccines being less controversial in Asia-Pacific with fewer anti-vaccine movements.

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.

US job market

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 September data showed 194,000 jobs which disappointed the market. The pre-COVID unemployment rate was 3.5% or 5.7 mil people; the current unemployment rate is 4.6% or 7.7 mil people. The Fed will likely monitor the data over the coming months to decide on the future term of interest rates.


Inflation continues to show signs of rising above the long-term objectives of many of the developed nation’s central banks as shown in the table alongside. The trajectory for US inflation continues to rise, which is causing markets to react and anticipate an earlier than expected move by the Federal Reserve.

The disruptions in the global supply chain, as well as higher commodity prices, are playing a major role with regards to inflation spiking. This can be seen in the table alongside. Developed nations are experiencing larger disruptions and China and Emerging Markets. The IMF predict that disruptions will return to pre-crises levels in early 2022.

 Inflation may not be transitory, as forecast by the Fed and may be more permanent due to the effect of supply chain disruption. This in turn has suppressed China’s GDP to a low of more than 5 years of 4.9%. These factors are also likely to pressure equities. The Fed finds itself in a difficult situation as inflation continues to rise but unemployment is not yet at the pre-COVID levels. An additional 2 mil jobs need to be created. Notable job gains were made in the leisure and hospitality industries as well as professional and business services. With international borders opening up again and travel permitted, this should play a big role in continuing with the job creation in the leisure and hospitality industry.

US interest rate projections

The graph provides a view on when the Fed is likely to raise interest rates. The green line plots a view of the 19 Treasury Officials; the blue line plots the view of the market. Both anticipate the first hike (25 bp) occurring in 2022 with further hikes of (75 bp) in 2023 and (75 bp) in 2024.

The hike in interest rates will likely have a positive effect on the USD relative to other currencies unless other currency countries follow suit with a hike in rates.

The majority of financial assets (equities, bonds, property, etc.) will encounter some headwinds as higher interest rates cause the present value of future cash flows to diminish as a result of a higher discount rate. The discount rate is typically made up of a risk free rate – US10Year – and a risk premium. The risk free rate has continued to rise in recent months as shown in the table. 

The US10Y yield – or global risk free rate – has remained fairly stable in October rising from 1.52% in September to 1.55% at the end of October. The marginal increase has had minimal impact on financial asset valuations. Positive corporate earnings, as noted below, have more than negated a rise in the risk free rate causing equity markets to rebound this month. What can also be seen is how the bond market has reacted (maturities 1Y to 10 Y) to a sooner than expected rise in rates by the Fed.


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

All market indices rebounded for the month with the S&P500 (7%), Technology (6.9%) and Healthcare (4.7%). On a regional basis, Europe (4.8%%), UK (4.3%) and Emerging Markets (1.1%) also rebounded for the month. Corporate earnings surprises have outweighed the negative threat of a rise in short term interest rates.

Earnings & Valuations

With Qtr3 earnings season largely complete for the S&P500, the graph shows actual earnings relative to analyst forecasts on 30 Sep 2021. Actual earnings continue to surprise on the upside and is broad based, being the primary driver behind bullish markets (although the possibility of a correction is anticipated with rising interest rates as discussed above).

Actual earnings surprises have been a constant theme over the last number of quarters providing support for valuations.

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 9% (2021: 44.1%). 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, 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 a dividend yield in excess of 4%. This compares very favourably to virtually zero for US Treasuries. This is one of the key factors that has caused investors to favour equities as an asset class. We don’t see this changing much in the longer term but do recognize the volatility that will likely be encountered as the Fed starts its interest rate hiking cycle as mentioned earlier.


Global equity markets have rebounded and recouped all of their losses in September. Corporate earnings continue to surprise on the upside and together with good dividend yields support equity valuations at present. The Fed is likely to act sooner than originally anticipated as a result of inflation spiking and unemployment on a track to reach pre-COVID levels early next year. Portfolios have been adjusted to pair back the equity exposure a little and disinvest from interest rate sensitive positions where it makes sense to do so.

In South Africa, the provincial elections were completed on 1 November with results due shortly. The voter turnout % was one of the lowest in the last couple local elections. This is probably a sign of how fed up and disinterested voters are with lack of progress on many fronts. GDP has however rebounded quite well with GDP generated of 4.2% and 4.7% for Qtr1 and Qtr2 respectively. Trade surpluses have surprised on the upside as a result of mining exports and high commodity prices. The Current Account surplus as a % of GDP is now 5.6%, which is a vast improvement from the deficits pre-COVID. SARS has also been able to collect better than expected taxes helping SA manage its budget deficit and debt burden on its balance sheet. We remain hopeful that the ANC will use these windfalls to implement structural reform to create jobs and reduce unemployment, which has spiraled to an all-time high. The ZAR has come under pressure against the USD as have most currencies. This is largely driven by the strength of the USD on the back of earlier anticipated interest rate hikes by the US Fed than the weakness of ZAR. We therefore remain favourably exposed to ZAR hedged stocks for the time being.

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