Welcome signs of a market rotation

Equity markets continued to show strong positive momentum this quarter. Locally, the JSE All Share Index (ALSI) finally broke through its pre-pandemic record high set in 2018. It has delivered its strongest first quarter performance in 15 years, posting a quarterly total return of 13.2% in rand. Both here and abroad, we have started seeing early signs of a rotation in markets. Price movements since the March 2020 crash have provided encouraging early justification of our argument for differentiated positioning to the consensus view.

Different parts of the market continue to dominate performance. The initial sharp recovery after the March 2020 crash was largely driven by technology and staples companies that received a boost from pandemic-driven demand and ‘work-from-home’ arrangements. However, markets have recently seen a major rotation away from what had previously worked (mostly growth stocks) into investments that have not performed well to date, and which were harder hit by the pandemic.

These include value funds, cheap and smaller companies, emerging markets, contrarian investment strategies and companies positively correlated to rising rates and global reflation in particular.

We have previously written about the large valuation divergences evident across markets as a result of the extraordinary levels of crowding into past winners and the capitulation out of what had not worked, and we have advocated for different positioning to the consensus view.

Where to next?

The key question on many investors’ minds, given this sharp recent rotation, is: where to from here? We anticipate that post-pandemic recovery will not happen in a straight line. Exceptional conditions and high levels of stimulus will continue to contribute to market mispricing and volatility in a variety of forms.

It is hard to deny that index levels are high and given the valuation backdrop across many major markets, prudent future return expectations from major indices should be relatively low.

However, we believe there is still scope for portfolios of differentiated equities to benefit from mispriced opportunities in selected areas of the market. Now more than ever, we remain convinced of the value that a differentiate approach brings as part of a carefully constructed portfolio.

ENDS