Investors in general benefitted from healthy market returns in 2021, especially in equities, buoyed by the global economic recovery and strong earnings growth. Challenging global macroeconomic issues such as supply chain bottlenecks, labour shortages, the resultant inflationary pressures, surging cases of the Omicron variant and in China specifically, tightening regulatory measures, all contributed to volatile market conditions last year. Global inflation is rising, as expected, and marks the end of central bank support, worldwide. This is a significant change to the dynamics of the markets. We all know more about supply chains than we have ever possibly cared for, with a host of disruptions to production and shipping. This has resulted in empty shelves around the globe and more importantly rising prices. These two fascinating charts below from The Economist, highlight how shipping times have changed over the past two years. In 2019, shipments from China to Europe took about 60 days, and to the USA about 50 days. Of late, it takes 108 days to Europe and 114 days to the USA. Unsurprisingly, freight rates have soared, with supply chain pressures up, labour and product shortages are now at historical highs.
Source: The Economist on 24 January 2022
Without large scale stimulus, economic growth will moderate into the second half of 2022 and with that a reduction to these supply chain disruptions. If labour shortages remain, wage inflationary pressures may be around for longer.
The key question the market is grappling with is inflation. Will the current trend in inflation be transitory or not? Monitoring the tight rope of interest rate policy to curb inflation whilst sustaining growth will keep investors on the edge of their seats this year.
The markets over past quarter and year
As mentioned, 2021 was a good year for equity markets. Global equities ended the year strongly, up 6.7% in in the last quarter, and bringing the total return for 2021 to a healthy 18.5%. Returns diverged materially as developed markets performed better in the quarter, up 7.8% and up 21.8% for the entire year. In comparison, emerging markets were down 1.3% in quarter and down by 2.5% for 2021, reeling from the aftermath of the regulatory crack-downs in China. Mainland, Chinese equities were down 22.5% for the year. Domestic equities continued to rally in the quarter, up 15.1% with the total annual return an impressive 29.2% for 2021, notably driven by the small cap sector which was up 59% this year. Our currency weakened by 5.2% against the US dollar in quarter and 8% for the year. The performance of commodities reflects the global economic challenges more accurately for both the quarter and the year to date, as platinum struggled while oil recovered from their extremely low levels of 2020. It is interesting to note that Brent crude oil is trading around $90/bbl, levels last seen in 2014 and well above the unprecedented pandemic low of $15/bbl in 2020.
The charts below highlight the performance of selected markets and asset classes for the fourth quarter as well as the year ending 2021
Source: MSCI, Datastream, Morgan Stanley Research, Bloomberg and Visio
Valuations and opportunities
USA equities have consistently outperformed the rest of world since the global financial crisis, driven by the large tech growth companies such as Amazon, Apple, Facebook (now Meta) and Alphabet. Valuations in the USA are currently quite finely priced, both on a historical basis as well as when compared to non-US markets as highlighted in the charts below.
Source: JP Morgan Asset Management, data as at 31 December 2021
Whilst current global growth remains a supportive environment for the equity markets, rising rates may contribute to further volatility, especially in the more highly rated markets such as the US. In addition, as growth rates normalise, more moderate returns for equities are expected for 2022.
The local economy has rebounded from the pandemic slump and is expected to continue a steady but slow recovery into 2022. Domestic equity valuations remain attractive, with the resources sector in particular trading at historical lows. When compared to the emerging market universe, most of our sectors are at larger discounts than normal to the peer group.
Source: JP Morgan Asset Management, data as at 31 December 2021
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.
A colleague recently reminded us, after reading a piece written by Howard Marks, that “Being invested is by far the most important thing.” Instead of attempting to time the market, which we believe is difficult, consistent returns over time with a considered investment strategy remains the optimal approach to superior long-term returns.
Within our equity selection, we continue to focus on the underlying long-term fundamentals of each investment that we make to determine the return outcome, irrespective of the macro conditions. We reaffirm that each component in your portfolio construction is working to ensure the risk and return characteristics of your assets are optimal, irrespective of the market conditions. We are pleased to note that returns in these extremely volatile times have remained robust, with volatility kept to a minimum.
Become a Baymont Wealth Tax-Free Savings investor
We are keen to announce that the BACCI SNN Equity Fund in now available as a Tax-Free Savings Account (TFSA) for our clients.
How it works:
The account is exempt from tax on all returns
A maximum of R36 000 per annum to a maximum of R500 000 in a lifetime is allowed
You can access the investment anytime, but withdrawals cannot be topped up again when determining tax free limits
Start investing, the earlier the better, to gain the full advantage of the benefits from compounding growth. The illustrative chart below highlights the difference in growth between a tax free and taxable investment made in real terms, from birth to retirement age. In essence, your tax free investment value can be double over this period.
Maximum investment of R36 000 per annum from birth until the limit of R500 000 is reached at 14 years and held until retirement age of 65
Full Marginal Tax Rate of 45%
Inflation of 5% per annum and real growth rate of 6% - in line with long term averages
30% of portfolio invested in interest bearing assets which generate 6% interest per annum;
67.5% of portfolio invested in equity which generate dividends of 3% per annum;
Remaining 2.5% of portfolio invested in property which distribute an income of 7% per annum; and
Assumed sale at the end of the investment period and the CGT incurred was modelled over the projection period for illustrative purposes.
An investment made for your child at birth and left untouched until they retire will result in an investment value of R16.5m in today’s value. Enough to earn a retirement income of R70 000 per month. Apart from an excellent opportunity for yourself, why not consider leaving a life-changing legacy for your children, grandchildren, godchildren...? Be that favourite grandparent, parent, aunty, uncle…
Baymont Wealth offices
We have settled into the new Baymont Wealth offices at the V&A Waterfront. Please come and pop in and see us. It is such a privilege to be situated in the harbour.
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