Finally, we come to the end of another volatile year that tested the best of us. Since the latter parts of 2018, global markets have not been kind towards investors. Markets fell by roughly 15% in the final stretches of 2018, then recovered, and then the COVID-19 pandemic in 2020 beat down the markets by more than 30%. After governments stepped in with substantial fiscal and monetary support, which ballooned debt and overstimulated demand even more, the recovery was quick. Until 2022 came along. This time it was the historic shift in monetary policy that beat markets down. Unfortunately, 2018 is about as far back as investors remember. In this specific application of the recency bias it causes investors to make the wrong long-term asset allocation decisions because the short-term volatility we experienced since 2018 gets the best of their emotions. In the end, their long-term investment performance suffers.

In South Africa, interest rates have doubled from 3.5% in November 2021 to 7.0% at the end of 2022. This means that every R1 million debt that a household has, is now R35 000 more expensive each year. That means almost R2 920 extra expenses each month, an almost unbearable load for consumers who are already stretched thin. In the United States (US), the Federal Reserve (Fed), increased rates at a similarly historic pace. Although US consumers were fattened by plenty of government support, and more than a decade of overperforming equity markets and other asset classes. US consumers have therefore gone through their interest rate hiking cycle almost unscathed; albeit for now. Nevertheless, this historic shift in monetary policy shook the very fabric of markets as asset class returns and investor sentiment started to normalise. At one point in time, global markets were again down by roughly 30%. But year-to-date the MSCI All Country World Index, an index that represents most of the largest companies in the developed world, is only down -13.25% in USD (or -10.98% in ZAR). Closer to home, the Johannesburg Stock Exchange All Share Index (JSE ALSI), an index of all listed companies on the JSE, was up by 1.52%, outperforming global markets simply because it has been underperforming for many years.

Unfortunately, investors are plagued by recency bias; most of us cannot even remember what we did a few weeks ago, how can we be expected to remember how different asset classes performed over the last 15 plus years? Biases like recency bias and loss aversion, also cause us to interpret reality incorrectly, making it almost impossible to objectively, and therefore accurately, allocate assets for the next 15 plus years. This causes investors to become emotional and short-sighted and end up selling out of good long-term strategies. Even the new favourite, structured products, have not stood the test of time and we have seen many clients who were upset with the decision they made to allocate an overweight position to structured products. As an example, many investors who piled into various Eurostoxx structured products, the favourite of 5-10 years ago, lost out considerably as inflation and costs ate into their capital, which was at least secure. But that is not the worst of it… You must also consider the opportunity cost of getting your money back after 5 years and having missed out on the returns of alternatives; even the JSE ALSI outperformed many of these structured products. However, history is clear that after tax, inflation, and costs no other asset class in the traditional financial sector outperforms equities. History is also clear that trying to time the market rarely ever works out well for investors. Research is also clear that the objective and holistic assistance of reputable financial advisors and asset managers adds substantial value to investors in the long-term.

Where does that leave us for 2023? At the end of 2021, we advised our clients to prepare for steep interest rate increases. Those who listened are in a much better position now. We recommend that individuals should not allow short-term volatility to change their long-term asset allocation decisions; even in a worst-case scenario where a president might have to step down. Do not be too hasty in making decisions. Seek objective truths, and always speak to your independent financial advisor so they can help you to develop a holistic, multi-generational financial plan. With a clear objective, a time-horizon that stretches over generations, and an objective, independent analysis, you can allocate resources much more efficiently in the long-term and create the wealth you and your family deserve.

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.