The market environment has changed significantly after 13 years of bull markets, declining interest rates and low inflation. Headline news on inflation, rising interest rates and the risk of a recession dominate. Economic fundamentals have changed, with the conflict in the Ukraine adding further concerns. Markets are weaker and volatile.
After a strong year in 2021, global equities and bonds declined by 5% this quarter, Major indices reflected negative returns, with China particularly hard hit, down 13%. China still feeling the aftermath of the regulatory policy announcements in 2021 and economic growth concerns following the hard lockdown stance taken by the authorities to curb a resurgence of covid infection rates.
Domestic equities increased by 4% this quarter, notably driven by the financial and resources sectors. Our currency strengthened, up 9% against the US dollar in the quarter and in fact flat year on year. The conflict between Russia and the Ukraine, both resource rich countries, has impacted on commodity prices, from energy, metals and food. Inflation, particularly fuel and food, will be a harsh reality for consumers this year.
The charts below highlight the performance of selected markets and asset classes this year.
Source: MSCI, Datastream, Morgan Stanley Research, Bloomberg and Visio
After a world awash with ‘free money’ under central bank policies and significant fiscal stimulus, global growth expectations were moderating into 2022. There is no doubt growth will be slower amid policy tightening to curb inflation. Elevated supply chain costs and higher commodity prices, further exacerbated by the Russian and Ukrainian conflict has increased the vulnerability of economic recovery for 2022. A moderation of return expectations in general is now a reality.
South Africa has enjoyed the window of opportunity provided by higher commodity prices, in particular the resources sector. This rally will moderate as we enter a tightening global interest rate environment. For our currency, the consequence of the interest rate differential closing, may mean the rand softens.
Sentiment has changed and equity investors have shifted away from high growth counters, specifically the tech darlings of the past decade. Growth has been repriced. Higher discount rates and lower value of future cash flows has been the key driver of the drawdowns over the past few quarters. Any hint of profitability challenges results in a dramatic price reaction.
We believe that financial markets tend to overshoot in either direction, getting too optimistic and too pessimistic at times. Intrinsic values of the underlying companies do not change as quickly as share prices would have us believe. Taking current market conditions into account, we think that markets have become too pessimistic, which has created opportunities for fundamentally attractive businesses.
While in the short-term markets may focus on current ‘noise’, the long-term fundamentals dictate market direction. For now, inflation is peaking and expected to slow, and the growth slowdown should not be alarming.
Some perspective consider:
In a meeting with Warren Buffet, Jeff Bezoz asked him:
“Your investment thesis is so simple.
You are one of the richest guys in the world and it’s so simple.
Why doesn’t everyone copy you?”
Warren Buffet responded by say:
“Because nobody wants to get rich slowly.”
Interestingly, 99% of Warren Buffet’s wealth came after the age of 56.
Our long-term bias in the portfolio allocation of our clients is to equities where relevant. Over time, equities outperform most investable asset classes available and more importantly provide real growth in the long-term. This holds true both locally and globally. During periods of expected recession, this changes and markets will fall. In time, this provides an opportunity to re-invest.
We continue to aim to be the wealth manager of choice for high net-worth individuals seeking tailored investment solutions and top-tier advisory services. We see an abundance of opportunity for investors in both local and offshore markets, and we are looking forward to sharing those opportunities with you.
Thank you for your interest and ongoing support.
We welcome any feedback or questions.
Oliver, Ulf, Vanessa and Warren