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Stocks and Soccer World Cups

Dr Francois Stofberg
Senior economist and head of sales: Efficient Private Clients

The 2022 Soccer World Cup that started on 20 November has become a hot topic at social gatherings, birthdays, and even work functions. With people’s spirits up because of more positive markets, coupled with the smell of summer and the December holiday around the corner, soccer supporters will undoubtedly fancy the chances of their favourite team winning this year’s tournament.

You would be excused for being sceptical about the impact of a soccer tournament on the stock market or on the economy. But, as history has proven, there are quite a few things that happen to the financial markets during this prestigious event. Not only do the results of a country’s soccer team influence stock market returns but so too do their schedule impact on the amount of market volatility. Additionally, there is also money to be made, with certain stocks benefitting from the tournament, as more people travel, spend, and bet that their favourite team will end up winning.

There is also a strong correlation between stock market returns and Soccer World Cup results. It is not simply because everyone likes to win, and if they win their markets win too, or that there is nothing better than a great comeback story, both on the field and off the field, that is, on the stock market. In a paper entitled “Sports Sentiment and Stock Returns”, it was found that in more than 1 100 soccer matches, dating back to 1973, stock markets returned below-average returns the day after a country’s team lost a match. This proves how disheartened a country’s investors can become after their team loses. What is also interesting is that stocks’ overall performance was worse during World Cup periods when compared with other periods, delivering -0.5% returns as opposed to 0.5% in other periods. This is by no means a suggestion to move towards cash before the first tournament game starts. It is merely a reminder that it is important to remember that many other factors also play a big role in explaining the stock market’s direction during the Soccer World Cup.

Another interesting point to note is that trading thins out considerably during World Cup matches, which usually means a lot more volatility. A study conducted by Monash University showed that trading volumes declined by as much as 29% during matches because everyone’s attention was on the matches! And with Wall Street open for all of the United States’ team group stage matches, investors may see higher levels of volatility than usual, as trading volumes fall. History also shows that the most volatile period occurs when teams play into extra time, meaning that a game was drawn after 90 minutes of play. In two instances when countries played into extra time, dollar trading volume plummeted by a whopping 94%. Both matches involved Argentina, a nation fanatical about soccer, which partly explains the severity of the response.

There will also be listed companies that will benefit from the estimated 1.2 million people that will visit Qatar during the 2022 World Cup. Well-known brands, such as McDonald’s and Coke, have deep roots as sponsors of the event, and typically use the tournament to re-establish their global dominance, which indirectly drives sales. Another well-known giant, Marriott International, will benefit directly, as more people stay in their Qatar hotels, including the five-star Ritz-Carlton. Then there are lesser-known companies, such as DraftKings, who will benefit as more people place big bets on their favourite teams.

What is certain is that there will be winners and losers during this year’s tournament, both on and off the field. It is, however, extremely important that investors do not get carried away with short-term trends, volatility, news flow, and what-ifs, but to rather keep their eyes fixed on their own long-term goals.

Good CPI, good markets, bad FTX

Dr Francois Stofberg
Senior economist and head of sales: Efficient Private Clients

Global markets received some welcome news last week when the annual pace of consumer price inflation (CPI) in the United States (US) was lower than expected in October, coming in at only 7.7%, down from 8.2% in September. Pre-holiday retail discounting, a decline in used car prices, and a welcome easing in rental inflation were key drivers of the overall decline in CPI. Lower inflation will provide some relief to consumers and investors, as well as give some momentum to the idea that the worst is now behind them. What markets are hoping for from the lower inflation reading is that, even if the US central bank, the Federal Reserve (Fed), continues to increase interest rates, that they will do so less aggressively. Consequently, the S&P 500, an index of the largest firms in the US, rose 5.5% on the day of the announcement, whilst the Nasdaq Composite surged by almost 7.4%. It was the best day since 2020 for both indices and the best weekly performance of the technology sector in the S&P 500 since April 2020, surging by more than 10%.

Lower-than-expected inflation has also strengthened the case that prices will moderate in 2023 after a period of elevated inflation, owing to pandemic-related supply constraints, coupled with large fiscal transfers and loose monetary policy: The first of which throttled supply whilst the latter overstimulated demand, with the net result being the substantially higher prices that we are experiencing today. However, one month of lower-than-expected inflation is not enough to bet the house on. Rental prices might have stabilised but they will continue to put upward pressure on core inflation for some time because of the stock of older rental contracts that are coming up for renewal in an environment that is more expensive.

Our view is that inflation will remain sticky and above the US Fed’s target even as they start to moderate. We also would not be surprised to see some temporary re-acceleration as hurricane-related replacement demand temporarily lifts prices in some goods categories. October’s CPI report is also not universally positive for the economic outlook. Indeed, a surprisingly weak inflation reading is likely to reflect softer consumer spending and increased margin pressures for the corporate sector. Technically, the US is in a recession but this has not yet translated into an earnings recession, which many analysts believe is still around the corner. For these reasons, the rand and other emerging-market currencies strengthened. At one point, the rand was close to R17.20 against the US dollar, its best level since mid-September. Emerging-market currencies also benefitted as China moved to ease some of its quarantine rules. Chinese authorities announced several COVID-19 relaxation measures, including reducing the quarantine time for inbound travellers and scrapping the international flight ban.

On a side note, the cryptocurrency world was rocked when FTX, one of the world’s largest cryptocurrency exchanges, filed for bankruptcy protection, owing to a liquidity crisis. Bitcoin consequently plunged to a two-year low. FTX halted customer withdrawals after about $5 billion worth of withdrawal requests came in. Because of a lack of sufficient regulation and good governance, FTX lent out roughly $8 billion of customer assets to fund risky bets by its affiliated trading firm, Alameda Research, setting the stage for the exchange’s implosion. In traditional markets, platforms must keep client funds segregated from other company assets, and regulators can punish them for violations. Events like these are why we maintain that more regulation is needed before cryptocurrencies can be adopted by the mass market, and that clients who do own cryptocurrencies should do so off-exchange as an added layer of security.

Strong global demand and a hawkish Fed

Dr Francois Stofberg
Senior economist and head of sales: Efficient Private Clients

Airbnb, an online marketplace focussed on short-term homestays and experiences, reported its highest quarterly profits ever, confirming that the travel industry continues its pandemic recovery in the face of historic inflation. This, in turn, confirms that global demand is still strong and that central banks will need to do more to curb demand and the upwards effect that it has on high inflation. The home rental platform saw its net profits climb 46% year-on-year. Trips to non-urban areas “are here to stay as millions of people have newfound flexibility in where they live and work”. The company further noted that the number of new “hosts”, people listing properties on its site, is also rising, just like during the great recession in 2008 when Airbnb started. As interest rates and the cost of living increase, people are again interested in earning extra income through hosting. Overall, more global travel and more income opportunities indicate that the global economy is strong, and that demand has not been reduced sufficiently enough to curb inflation.

Asian markets recovered somewhat last week after weeks of bad news kept downward pressure on them. An unverified note circulated on social media claimed that the Chinese authorities were planning to re-open China from their harsh COVID-19 restrictions. Among others, China seems to be planning on re-opening their borders early next year, as well as removing the penalty on airlines who bring infected individuals into China. Emerging market equities were further supported by a short sell off among United States (US)-listed equities after the US Federal Reserve (Fed) pushed back against expectations of a softer approach to monetary tightening. This news stunned traders and ramped up fears about a global recession.

US Fed Chair, Jerome Powell, told a news conference last week that, while the size of increases would likely come down, they would top out at a higher level than expected. He was quite aggressive in his message, stating that: “We will stay the course, until the job is done”. Other major central banks have signalled that they will tone down their hawkishness, even in the face of decades- or record-high inflation. Most of these central banks are too concerned with the short-term pain inflicted by the process of creative destruction that re-allocates scarce capital more effectively and allows economies to grow healthier in the future. Unlike the US, they choose a slower approach that runs the risk of creating a zombie-like economy that never gets rid of underperforming corporations and state-owned enterprises. They also run the risk of ‘inflating’ the problem, which can lead to a more catastrophic outcome.

After recently increasing interest rates for a fourth consecutive time by 0.75%, to a range of 3.75% to 4.00%, we expect that the Fed will increase interest rates by another 0.50% in December. A key reason for not changing their rate-hiking strategy is the still strong US labour market, which added 261 000 new jobs in October, higher than the Dow Jones estimate of 205 000. This was the slowest pace of job gains since December 2020 and the unemployment rate was 3.7%, higher than the expected 3.5%. Powell also warned that there would be a lot of volatility still ahead. Something that we doubt that investors are looking forward to, seeing as their nerves have been tested since January.

October Economics: Optimism amid uncertainty

Dr Francois Stofberg
Senior economist and head of sales: Efficient Private Clients

Investors have experienced a rigid “dichotomy” in financial markets over the past two months: September and October stood in stark contrast to one another. Within the space of two months, we have experienced one of the worst and one of the best months of the year.

The performance figures speak volumes: After losing almost 10% of its value in September, the MSCI All Country World Index (ACWI), a well-diversified global index of equities, clawed its way back and recouped almost 5% of those losses in October. Almost unbelievable but yes, these are not annual performance figures, but monthly figures! In this tug of war, volatility is running rampant. The increase in volatility is because financial market participants are scared, anxious, nervous, and uncertain. All words which legendary investor Warren Buffet would have used as a measure to indicate an opportunity to pick up wonderful companies at attractive prices.

Perhaps the “Buffet-mentality” can partly explain why markets performed so well during October. Stocks like Oracle and Netflix, still trading in negative territory for the year, managed to climb more than 24% during October because of extremely attractive valuations. Then, there is also companies like Apple, constituting almost 7% of the S&P 500 index, that are still succeeding in most of their business segments despite a weak global macro-economic backdrop. Apple, a Buffet favourite, returned almost 11% for the month after the iPhone maker managed to offset lower iPhone sales with higher prices. Another big winner for the month was Twitter, rising with more than 22% for the month after Elon Musk finally made good on his promise to take the social media giant private following months of waffling, lawsuits, and verbal mudslinging with Twitter’s board.

Despite the positive performance in markets, there were also a couple of bad apples in the basket. Amazon tanked 18% after stating that fewer people are buying products on its platform. Compared to Facebook’s parent company Meta, Amazon’s numbers are not looking that bad. Meta sank 25% as the outlook for advertising deteriorated, but can take some comfort from the poor performance of the sector. Intel, Alphabet, Microsoft, and Texas Instruments are all still struggling at the moment.

The corporate world was not the only place where performance stood out in October. Politics also stole the limelight. In the United Kingdom, history books will not speak kindly of Liz Truss. On her 45th day in office, Britain’s prime minister threw in the towel amid a series of blows to her leadership, paving the way for Rishi Sunak to take over. He is Brittan’s third prime minister in 2022 alone. In China, Chinese President Xi Jinping secured a third term in power and in the process set himself up to be president for life. Xi demonstrated that loyalty trumps ability when he appointed apparatchiks whose primary qualification is not their expertise, but rather their loyalty. Markets did not take kindly to the news and caused Chinese-listed stocks to take a severe beating.

In South Africa, Enoch Godongwana, delivered his Medium-term Budget Policy Statement (MTBPS), in which he stated that South Africa’s fiscal position had improved, owing to improved tax revenue from mines. Unfortunately, most of those funds will be allocated to our highly indebted state-owned enterprises (SOEs) as well as the ongoing Social Relief of Distress (SRD) grant program for 7.4 million individuals. We are hoping that the government can continue to make the tough calls and keep social spending lower whilst increasing economic spending. That is, effectively spending on healthcare, education, infrastructure, and the ease of doing business. Although social spending helps to keep SOEs alive, and gain more votes (through SRDs) it does not create jobs in the long-term.

While news around macro-economics, market volatility and mind-numbing politics continue to dominate headlines and drive investor morale, we are starting to see hints of optimism in certain areas of the financial markets. This may very well pave the way for a strong finish to an otherwise dismal year.

How do the rich get richer? They stay invested and buy more!

Dr Francois Stofberg
Senior economist and head of sales: Efficient Private Clients

 

During the last couple of months, we have partnered with many financial advisors, doing our utmost best, to keep investors calm during this period of extreme volatility. It has not been an easy task. Since the last quarter of 2018, global markets have seen three major disruptions. In 2018, indices such as the S&P 500 contracted by more than 15% during the last quarter. In 2020, when the reality of the COVID-19 pandemic first hit global markets, we saw a contraction of almost 30%. If that was not enough, less than two years later, global monetary policy tightened up and Russia invaded Ukraine, sending markets down again almost 30%. But this is not the end of the story for South African investors. Most South Africans have the bulk of their equity invested in the local market, which has been performing poorly for many more years. As a result, investors have grown tired of equities, leading some to make poor asset-allocation decisions at the worst possible time.

Research is clear: Even after all of the upset and disappointment that we have seen in equity markets during the last couple of years, equities still outperform other asset classes in the long term, especially if we consider inflation, costs, and taxes. In one extreme case, a client invested offshore at the end of 2018. Spanning this four-year period, the client’s portfolio contracted by more than 22% in United States (US) dollars. But the client lives in South Africa (SA) and will eventually retire and draw an income from their investment in SA. So, this client should not only consider the US dollar return but their actual buying power, that is, the SA rand return, which is up by 8%. Of course, an annual return of 2% does not cover inflation and costs but viewing these four years of unrealistically low returns in isolation is also incorrect. Even clients who are close to retiring should consider these past four years in the context of their contributions across their entire lifetime. Clients who are still saving towards retirement should consider their entire investment lifetime. In this context, it is easier to remember why they should remain invested in equities even if this particular investment lifecycle takes longer than five years to see the type of returns that will, once again, outperform other asset classes. Research is also clear that investors usually make the wrong re-allocation decisions, that is, moving from one asset class to another, at the worst possible time. Retail investors have a nasty habit of selling out of their equity positions after the market crashes, only to buy back in once the market reaches new highs.

What clients should rather do is to use volatility as buying opportunities. One farmer explained it like this: “Each market crash is like a drought. During a drought, my cattle lose a lot of weight but I still have the same number of cattle. Instead of selling my cattle and realising my losses, I try to buy my neighbours’ cattle!”. This is exactly what private equity (PE) firms are doing, even in SA. Since 2018, more than 20 firms have delisted each year from the Johannesburg Stock Exchange. Many of these firms were purchased by PE firms, who simply could not resist the attractive valuations. So, while retail investors are switching out of their equity positions (selling their skinny cattle), institutions are buying up everything (their neighbours’ cattle). The reason institutions do this is because they are less emotional, they understand the long-term value and benefits of equities, and they know that time in the market is what matters most. While many retail investors tired after four to six years of unexpected low returns, institutions did not. While retail investors got emotional and sold out of their long-term convictions, institutions did not. And this is how the rich get richer.

Year-end rally? Christmas may come twice this year…

Dr Francois Stofberg
Senior economist and head of sales: Efficient Private Clients

After having suffered through September, global markets, historically, tend to experience more positive performance during the last three months of the year. Even though the chance of this may look slim this year, when compared with previous years, a year-end rally may just be on the table.

On average, United States (US) markets gain 3.9% during the last quarter of the year. The reason for this is unknown but one explanation may be that investors flood back into the market after the historically dismal performance of September, where returns usually average around -0.6%. What is also interesting is that, historically, the performance during the last three months of a year in which mid-year elections are held, is even better than other years. Usually, when it is time for a mid-year election, markets jump 6.3% during the last quarter.

Even though the US will have a mid-year election this year, on 8 November, markets may buck their historic trend. This is, firstly, because inflation in the US and most other parts of the world is remaining stubbornly high. US inflation reached a new high in September with core inflation remaining very sticky. The US is in a very strong economic position, which could make inflation a little bit stickier than most people would expect. An example of their strong economy can be seen in the labour market, where there are nearly two jobs available for every unemployed person. This explains why wages are roughly up 7% compared with a year earlier, as employers fight for new talent and to retain existing staff. Workers who earn more use these higher wages alongside excess savings to fund purchases, which drive prices up even more in the process.

As a result of higher inflation, the US Federal Reserve has indicated that they are not willing to take their foot off the pedal just yet. The resulting higher interest rates mean that companies must contend with higher borrowing costs, which erode their margins. Higher interest rates also mean lower earnings in present value terms because of a higher discount rate. The latter has a direct impact on the price that buyers are willing to pay for a company. All of this means some more pain for equity markets.

Secondly, investors are still extremely concerned about the possibility of a real recession, not just the technical recession that we are currently experiencing in the US. Despite re-iterating that the economy is still strong, JPMorgan Chase’s Chief Executive Officer, Jamie Dimon, a well-respected man on Wall Street, warned that a “very, very serious” mix of headwinds was likely to tip both the US and the global economy into a recession by the middle of next year. Europe is, most likely, already in a recession, despite the Head of the International Monetary Fund, Christine Lagarde’s, call that this is not the case. With the possibility of a recession weighing on investor sentiment, it is very important to remember that equities have already gone some way in pricing in a recession, considering that US markets are down by almost 25% from their highs. Financial markets are thus looking forward and, therefore, price in events well in advance.

With a myriad of global uncertainties weighing on financial assets, history may just be on our side over the next few months (if there are not any new surprises, of course). What is certain is that investors will almost surely welcome a year-end rally and a possible second Christmas.

 

term investment opportunity!

How to achieve above-average investment returns over the next decade

Dr Francois Stofberg
Senior economist and head of sales: Efficient Private Clients

After more than a decade of above-trend market performance, many developed markets have started a process of mean reversion. Many leading global banks and asset managers believe that the average annual share performance among companies in the United States (US) will only be 5% in USD over the next decade. This is far less than the above 20% annual growth that we often saw over the past decade.

We agree with the view of many experts that US equities should outperform their European counterparts simply because of the underlying philosophy of European policy. For one, the Americans can use the blunt tools of monetary policy much more effectively than the single-currency block can. The Americans are also much more brutal when it comes to the efficient allocation of scarce resources. Conversely, the Europeans would rather keep a less efficient capital allocation system alive, whether that be by government’s hand or the private sector, than cause their citizens some temporary discomfort.

The shift back towards the long-term mean (read average) equity market performance was, of course, brought about by the structural shift in monetary policy. After reaching lows not seen for more than a millennium, interest rates in the leading global economies have made an abrupt U-turn, shaking the very fabric of investor sentiment. While loose monetary policy made equity investing easy, the return to what many believe is normal, is causing a lot of confusion among investors. Now, bonds, among others, are starting to look more attractive. More choices on top of all of the market uncertainty caused investors to become startled and to reconsider their asset-allocation decisions. But over the last couple of weeks, it seems as though investors have slowly started to regain their confidence, realising that the long-term story that favours equity has not changed, and that volatility simply allows for good buying opportunities.

It is important to understand that lower average equity returns do not mean that some companies will not continue to deliver returns far greater than 5%. It only means that, now, more than ever, active management is of the utmost importance. It means that simply buying a passive instrument that tracks the market, overweighted by the largest, mostly US technology companies, which benefit most from historically-low interest rates and yield-curve control, will not be sufficient to generate above-average returns. To achieve above-average returns in the next decade, investors need the correct structures and exposure to the correct asset classes. Please note that I purposefully do not mention fees. That is because retail investors in South Africa (SA) have an unhealthy appetite for lower fees, which will, undoubtedly, lead to unwanted outcomes in the future. Fees are well-regulated to protect investors in SA who partner with reputable and regulated partners. But driving fees ever lower distorts the market’s ability to effectively price and to allocate resources by leading to foreclosures, cutbacks, layoffs, and even sector consolidations.

How you structure your investments will become of the utmost importance in the next decade. That is, in which legal entity and in which tax jurisdiction you own assets. Clever investors, who structure their assets in the most tax-efficient manner, will be the clear winners. After effectively structuring assets, asset-allocation decisions will become increasingly important over the next decade. For one, it will become increasingly important to invest in alternatives, such as private equity and hedge funds. It will also become increasingly important to consider certain long-term thematic investment themes, such as investing in water and investing in a more socially-responsible way. It will likewise become increasingly important to consider in which geographies you invest. Unlike the decline, that is, the return to normal, we are starting to see in the developed world, many of the emerging countries (including SA) who struggled over the past decade, are slowly starting to re-emerge, offering very attractive returns.

Unfortunately, by not structuring their estates effectively and by not investing in the correct assets, most retail investors, especially those who have been scared out of markets over the last year, will miss out on what could be above-average performance over the next decade.

September economics – ouch!

Dr Francois Stofberg
Senior economist and head of sales: Efficient Private Clients

“Historically, September is the worst month of the year for equities.” We used these cautionary words in our previous monthly newsletter to describe a possible poor month for markets in September. It would seem that we could not have chosen our words any better for what lay ahead.

Global markets, as measured by the MSCI, erased almost 10% of their value in the space of a month. The worst month of the year thus far. So, what happened in the world during September?

The largest market in the world, the United States (US), hit the ground running early on, rising with more than 3%. Investors brushed off US Federal Reserve (Fed) Jerome Powell’s warning that the Fed will stay steadfast in their battle to tame inflation. But investors should have known better than to take on the 800-pound silverback gorilla which is the US Fed. Following the release of higher-than-expected inflation and improved manufacturing figures for August, investors received a reality check when the US Fed took a firm stance on inflation, and the US market started its downward descend. The Fed moved swiftly and hiked interest rates by 75 basis points for the third consecutive time, which pushed markets down even lower.

Across the Atlantic, United Kingdom politics dominated headlines at the start of September as the country swore in a “plain-speaking Yorkshire woman” as Prime Minister in Liz Truss. Unfortunately, her celebrations were short-lived after Queen Elizabeth II, the longest-serving British monarch in history, passed away on 08 September. With a new tax-cutting, regulation-slashing, and energy-subsidising government in place, the British pound weakened to a 37-year low against the US dollar. The Bank of England (BoE) would have been all too pleased if the pound was their only concern. Unfortunately, they also had to contend with higher yields on British bonds, prompting the BoE to re-introduce quantitative easing.

Europe, in contrast, cannot even so much as whisper quantitative easing, as the block is already struggling with a wildfire situation with inflation increasing by an eye-watering 10% year-over-year in September. To add fuel to the fire, reports emerged that gas leaks were found in the Nord Stream 1 and 2 pipelines, Russia’s largest gas pipelines to Europe. These have been ascribed to an “apparent sabotage”, as per Jake Sullivan, the US’ National Security Advisor.

Moving east, China started the month off on a very different foot than most of its peers. Plagued by ongoing rolling lockdowns, investors opted to steer clear of the Red Dragon as economic growth continued to falter. To boost economic growth and to regain investor confidence, China’s biggest state-run banks decided to cut deposit rates for the first time since 2015. Unfortunately, this only led to China’s currency, the renminbi, falling to its lowest levels since 2008 against the US dollar.

Locally, the rand suffered the same fate as its global peers. It continued to lose ground against the greenback as risk-off sentiment and higher interest rates drove up demand for the US dollar. Adding to the woes were the ongoing bouts of load shedding that seem to have no end in sight. Despite these setbacks, South African equities showed greater resilience than most markets for the month, but still closed lower by more than 3%.

Going forward, historically, October provides a net positive return for investors despite being the month of the 1907 Panic, and the 1929 and 1987 Black Mondays. What is certain is that investors will continue to scrutinise the impact of a strong US dollar on the global economy in addition to the upcoming earnings season in the US.

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