Globally, stock markets recovered from the deep drawdowns experienced in the first half of 2020 and ended the year mostly with positive double digit returns. Momentum and Quality underpinned this recovery from a style perspective, with Value extending its losses further.
Locally, Value was the best-performing factor, continuing its rebound from years past and cementing the notion of a Value rebound. Momentum (and, in particular, Price Momentum), along with Quality metrics, continued detracting from Value. Low Volatility posted double digit positive return spreads through the quarter, highlighting that “stable” and “cheap” were the dominant factors locally in an otherwise historically turbulent year.
Price Momentum (-8.9%) showed strong negative returns in Q4 while Earnings Revisions (6.7%) continued to contribute positively to the Momentum factor. Price to Book (16.0%), Earnings Yield (12.2%), Dividend Yield (11.6%) and Price to Cashflow (13.5%) all rallied in Q4, making Value one of the best-performing factors for 2020. Growth (15.5%) showed robust return signals, while Profitability (-3.0%) lagged its quality counterpart. Leverage (-14.65%) failed to deliver as investors sought to avoid highly geared and risky stocks. As the markets recovered from the first half of the year’s losses, Low Beta (12.7%) and Low Vol (11.5%) garnered strong market support.
The fourth quarter started as a potent cocktail of uncertainty amid a resurgence of coronavirus infections across the globe, with some countries re-imposing lockdown restrictions, triggering a sharp sell-off in October. Increasing geopolitical tensions and looming US election uncertainties all served to heighten tensions and underpin global uncertainty. Subsequent to October’s sell-off, markets again rebounded with the MSCI World Index (14.0%), MSCI Emerging Markets Index (19.7%) and MSCI USA Index (13.0%) all handsomely paying off in net US dollars. Locally, the South African rand somewhat surprisingly appreciated by 12.1% to the US dollar, closing at R14.67 to the greenback, R20.08 to the pound and R17.94 to the euro. The South African Reserve Bank (SARB) committee continued to hold the repo rate fixed in November at the 3.5% level, with the committee not reaching a unanimous decision (underscoring the possibility of further easing to help bolster depressed economic activity).
Fitch and Moody’s added to South Africa’s economic troubles as Moody’s moved South Africa two levels below investment grade status while Fitch brought it three levels below. This, however, failed to move the proverbial needle on the rand, as market forces driving carry spreads continue to dominate local and fundamental idiosyncrasies in determining par value for the currency. We expect this trend of seeming “rand indifference” to local fundamental factors to continue as the fortunes of our liquid currency will likely remain inextricably tied to factors affecting global carry trade prospects in a low (or even negative) global yield environment in the next quarter.
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