DESTINY INVESTMENTS 2020

Last year we saw the rapid spread of a highly contagious virus throughout the world, resulting in the lockdown of institutions and countries. It felt a bit like a scene out of a movie.

Investment markets initially plummeted causing fears of companies going into liquidation and a global recession. There was concern about losing life savings and about running out of food and supplies. We have witnessed scenes of fights breaking out over mundane things like toilet paper, and shelves being emptied as people stockpiled goods.

All over the world, people are carrying elevated levels of anxiety and heightened fear. The only certain thing at this time is that nobody knows for sure what tomorrow holds. At times like this, it can be helpful to take a step back and see what lessons can be learned from history and what 2020 has taught the investor.

A look at the S&P 500 index over the last 50 years shows that ¹ black-swan events have affected the market in different ways, resulting in sell-offs that range from -5% to -50%. While in some cases the declines during these times have been severe, most have been short-lived. The longest recovery time for the S&P 500 has been four years, after the Israel Arab War/Oil Embargo in 1973. This is followed by the 2-3 years taken to recover following the 2007 global financial crisis, after which the market went on to record an 11-year bull run - the longest in history.

The year 2020 was a strange year indeed. We saw the quickest and deepest market decline in history, trillions of dollars of global stimulus, the highest volatility on record, negative oil future contracts, and the fastest recovery from a bear market ever. To top this off, the S&P 500 ended 2020 with a 16.27% gain, which was an above-average outing for the benchmark index.

Applying the black swan principle to the local market, we began the year with the JSE All-Share Index at 57,084 when we hadn’t heard of Wuhan (and the infamous virus) or Dr Fauci, and we thought Zoom was an application on our iPhones.

The JSE All-Share Index plummeted to an alarming 44,490 in March but closed 2020 at 59,408, a year to date return of 7%. Outstanding performance from the larger JSE All-Share Index constituents during the year must be noted from Prosus +52% Naspers +32%, BHP +18%, Richemont +19% and Anglos +22%.

Whilst the broader economy is still in a state of repair, investors finished the year in the black.

SELECTED LOCAL & GLOBAL WINNERS & LOSERS 2020

¹ A black swan is an investment term used for an event that is beyond what is normally expected of a situation and has potentially severe consequences in stock markets and the widespread insistence that the event and impact were obvious in hindsight.

The best and worst performing Companies of 2020 generally fell into two categories: those business models that benefited from COVID-19, and those that did not. Companies in winning sectors were often up double or triple digits -while their losing counterparts were often down double digits, sometimes even halving in value from how they started the year.

Global financial markets fluctuated in 2020 in reaction to the devastating COVID-19 pandemic and the subsequent decisions taken by governments and policymakers to protect citizens and keep economies afloat. Outside of Europe, global equity markets experienced strong returns in 2020. Easier monetary policy and additional fiscal support drove robust returns in equity markets in the United States (US), while European shares lost ground.

South African equities trailed global equity markets in 2020. Resource shares were the standout performers, while financial shares fared poorly. Listed property share prices were decimated, with valuations at rock-bottom levels. It is likely that the weaker fundamental environment has already been discounted by share prices in the sector.

WINNING AND LOSING SECTORS OF 2020

THE WINNERS

1. Software Applications

It was another banner year for Big Tech, but some of the top performing companies were those that acted as enablers to remote working and ecommerce. Perhaps the most notable entry here is Shopify, which rose 178% on the year and is nearly a $150 billion company today.

2. Internet Retail

While Amazon is the undisputed 800-pound gorilla in ecommerce, companies like Etsy and Wayfair also had incredible years as did many internet retail plays on the opposite side of the Pacific. Chinese company Pinduoduo, described as the fastest growing tech company in the world, gained 331% on the year as it capitalized on emerging trends such as social ecommerce, team purchasing, and consumer-to-manufacturing (C2M) sales.

3. Basic Materials

It’s been a long downtrend in the commodity super cycle, but materials have come back into vogue. Copper prices are at eight-year highs, and gold hit all-time highs in August 2020.

4. Freight and Logistics

The shift to ecommerce has come faster than anticipated, and companies that have embraced this trend couldn’t be happier. The transportation of ultra-refrigerated vaccines is lining up to be a key need of 2021.

THE LOSERS

1. Oil and Gas

The oil sector was already struggling pre-COVID with price wars and a supply glut, but then lockdowns and the shutdown of non-essential travel provided another blow.

2. Diversified Banks

With record-low interest rates, shuttered physical locations, and credit risks looming from unemployed borrowers, bank stocks struggled in 2020.

3. Real Estate – Retail

Many malls have not been collecting rent from their tenants creating a challenging environment for many property owners and managers.

4. Airlines

It goes without saying that less flying means less revenue for airlines. But going forward, with web conferencing now the professional norm, it’s also expected that lucrative business passenger numbers will take a hit in the future.

GIB DESTINY PORTFOLIO PERFORMANCES IN 2020

Before we discuss the portfolios and their performances, we would like to share our deepest sympathies with those who have lost friends, colleagues and family members to Covid-19. We also commiserate with those whose livelihoods and businesses have been negatively impacted by the pandemic.

Our prudent positioning of the Destiny Portfolios and remaining true to our asset allocation conviction served the membership well. Our underlying manager positioning at the beginning and end of the year was similar, namely overweight Naspers and PGMs and underweight SA domestics.

Despite the first quarter ending in the red, we remained fully invested in the equity markets providing our underlying asset managers the opportunity to capture a greater proportion of the market rally which allowed for an unprecedented recovery in April. The last quarter of 2020 did not disappoint, generating exceptional returns and paving the way for the Destiny Portfolios to surpass all its benchmarks as well as most portfolios in the Annual Industry Survey.

CHANGES TO THE DESTINY PORTFOLIOS IN 2020

The GIB Investment committee decided that cash’s ability to yield return had been compromised by the 2.75%reduction in the repo rate during 2020, in contrast to government bonds’ ability to yield returns. To this end, cash holdings were reduced and the bond allocation was increased.

In terms of the global vs local holdings, the conclusion was that global economies will have less recovery challenges and therefore the offshore holdings were increased across the board.

IN SUMMARY

Despite the circumstances, it was a good year for the Destiny Portfolios, with our portfolios performing well and beating their respective benchmarks. Given the exceptional volatility in 2020, we are satisfied with how we successfully navigated the choppy markets for our membership.