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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.

What is Investment Management?

What is Investment Management?

Investment management is the overall oversight and administration of a portfolio. In addition to buying and selling assets on a client’s behalf, Efficient Wealth’s wealth managing professionals determine the future course of our clients’ interests. As investment management specialists, we develop incisive investment strategies to suit our clients’ specific risk profiles, objectives, future needs, and financial goals. Read more

Stockbroking Portfolio Management

Stockbroking Portfolio Management   

Historically, the stock exchange, stock market and trading in stocks, shares, bonds, and cash have been intimidating to those inexperienced in the area. There has always been the perception that stockbroking portfolio management is reserved for the wealthy risk-takers of the financial industry or the technically astute businessman. In truth, the fine art and selective science of stockbroking portfolio management are neither technical nor difficult and can reap tremendous rewards and dividends. The key, however, is to have specialist support to help you limit risk and get the most returns. Read more

How painful can things get?

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

Last week, the United States (US) Federal Reserve (Fed) increased interest rates by 0.75% for the third consecutive time this year. Interest rates in the US now range between 3% and 3.25%, and many expect that rates will, most likely, increase to 4.40% by the end of the year. Fed Chairman, Jerome Powell, made it clear that they are willing to do whatever it takes to ensure that inflation is brought under control. He also made it clear that this includes allowing the economy to have a hard landing, that is, entering a painful and potentially deep recession. But how painful can things get, and what does this mean for long-term investment decisions?

What we can learn from history is that markets in the US usually bottom out three to six months before the economy does. The reason for this is because markets anticipate and then price in future events. The question thus arises: When will the US economy bottom out? For this, we can, once again, look to the past. Of course, history does not repeat itself exactly, therefore, we should be aware of the shortcomings when interpreting today’s developments through the lens of historic data. That being said, even though history might not repeat itself, it does often rhyme, and, for many reasons, it seems as though history will, once again, rhyme in the US.

Usually, recessions in the US last between 18 and 24 months, and, based on data, we know that the US is already in a technical recession. The US has been recessionary since January 2022 and entered a technical recession in July, after data confirmed that the country experienced two consecutive quarters of negative growth. Fast-forward 18 to 24 months and this means that the US will probably emerge from their recession sometime between the third quarter of 2023 and the first quarter of 2024. In this scenario, US markets should bottom out in the first half of 2023. Consequently, we continue to urge our clients to ready themselves and to take advantage of this investment opportunity of a lifetime.

But what does ‘ready yourself’ mean? Readying yourself does not mean waiting until the markets collapse, because the markets have a funny way of not always doing what we expect. Readying yourself does mean doing the necessary admin to ensure that you will be ready to invest. It means considering where the markets are, where the rand is trading at, and what your base-case scenario is. From here, prudent investors dollar-cost average (DCA) into their positions over a certain period. If it is retirement money that you are already dollar-cost averaging into your investment each month, please do not stop. If it is discretionary money that you want to invest now, it is good to DCA over a three- to six-month period, as the abovementioned is considered: The current market, the rand, and your base case.

It is worthwhile to mention that we do not believe that the US will enter a depression, where the economy remains recessionary for a protracted period. Usually, in a depression, a combination of consumer, business, and investor sentiment is almost wiped out and economic momentum is lost. We are, however, concerned that the European Union (EU) might enter a depressive period because, unlike the US, they are unwilling to force their economy into a recession that can re-allocate scarce capital to more productive uses; a process that is commonly referred to as ‘creative destruction’. What the EU is doing is likened to what Japan did that led to their zombie-like economy: They are trying to keep everything afloat, trying not to allow economic pain. Unfortunately, everything that is good, is growing, and everything that is growing will experience growth pains. If the EU does enter a depression, it will, most likely, lead to even greater support for the US dollar, equities, and bonds. Make sure that you do not miss out on this unique, long-term investment opportunity!

Effective Investment Management Services

Effective Investment Management Services

Never put all your eggs in one basket. It’s an age-old saying that has truth in every word. You’ve done well for yourself, and the eggs in your basket are growing significantly by the quarter. You may even have diversified funds into a few business ventures and other intelligent decisions that are maturing nicely. However, at some point, you might want to consider employing a company that offers Investment Management Services.

If you’re not fully skilled at being able to do it yourself, get a professional to do it. A business analogy that you may want to take heed of. It’s not that you can’t take care of your financial portfolio, but like so many other operating functions in other areas of your business and personal life, you would need to learn to designate people you can trust to do it. When it comes to financial risk, investment management services may be the professionals you might want to trust.

Don’t Hesitate – Delegate

In many sports, there are simply some things that can’t be done solo. Scuba diving is one good example. The professionals will always advise you to never risk diving alone. Always take a partner, preferably one with more experience than yourself, and someone you can trust. In the event of an emergency, or unforeseen obstacles or incidents, you can get assistance with resurfacing. It’s very similar when comparing it with your financial portfolio and investment management services.

It is always wise to follow this advice to avoid risk, or even catastrophic consequences, regardless of how much experience you have accumulated. Likewise, the rest of your life is not a high-risk game of chance. Because only one or two ill-advised financial decisions could set you back months, if not years, would you really want to chance “diving solo?”

Vital financial decisions may sometimes require professionals with more experience than yourself. Don’t hesitate, delegate these important financial decisions to people you can trust, like a leading investment management services company.

Effective Efficiency Drawn from Experience and Knowledge

Effective, efficient investment management services are much like a more experienced scuba diving partner. The important objective is to find someone who has a wealth of experience that you can trust. That can foresee potential difficulties, problems, and pitfalls and advise you of them. At the same time, warning you of the perils of going into dangerous areas.

At the same time, they should have enough skilled knowledge to mitigate all these risks and advise you of the difference between a hidden treasure and a useless piece of flotsam, whilst looking out for unexpected discoveries that might generate wealth. After all, regardless of who your partner is, there are always elements of risk and your financial portfolio needs to be protected from them.

Knowing the Difference between Flotsam and Fortune

At Efficient Wealth’s Investment Management Services, we’ve reinvented investing. Cutting through the flotsam, finding the fortunes with calculated calmness.

The fact is, there are so many options to invest in, each with its own risk, return, term, tax, and legal characteristics, such as managed and tax-efficient international investments, unit trust funds, and share portfolios. It’s sometimes to your own peril if you dive into these waters alone.

Allow Efficient Wealth’s Investment Management Services Division to conduct a comprehensive analysis of your existing portfolio. You can trust our experienced professionals to find the treasures.

Taking Care of Short-Term Insurance

Taking Care of Your Assets with Short-Term Insurance

From a broad perspective, if a financial planner is responsible for your future wealth and assets and a financial consultant adjusts and secures your immediate wealth and assets, then short-term insurance would protect the wealth and assets you have already acquired.

But, it’s not just your assets you’re protecting. It also takes care of and protects both you and your loved ones. If the clouds are hanging low, you give your child an umbrella before they go out. If you buy them a scooter, you get them a helmet. Short-term insurance offers the same umbrella, it simply covers more serious incidentals.

How it Works

You invest in short-term insurance with monthly instalments called premiums. How much you invest, would depend on the asset you’re covering and the likelihood of it being damaged. If it is damaged, destroyed, or lost, your cover would be enough to pay for repairs or replace it.

Short-term insurance offers a wide range of coverage. For example, you agree on an amount to be paid out if your vehicle is involved in an accident, or is destroyed or stolen. If these incidentals occur, you are paid the agreed amount. Just be aware that cars depreciate annually, so ensure that you update their value on that basis.

Other Packages You Might Consider

Comprehensive – Short-term insurance that covers the total value of your motor vehicle. Third-party cover is for damage you may have caused to someone else’s car. Balance of third-party (fire and theft) will cover you in the event of your car being stolen, if your car burns, or if you are responsible for damaging someone else’s vehicle or property.

Homeowner’s Short-Term Insurance – This may equal how much reconstruction of your home would cost in the event of structural failure or damage.

Household Contents Cover – This insures the remainder of your belongings that are in your home.

Personal Liability – This assists you if someone sues you personally for damage or injury caused on your property, while all-risk short-term insurance will cover items that are lost outside of your property. Personal accident cover will protect you and your family in the unfortunate event of one of you being disabled or dying in an accident.

Useful Tips

Regardless of whom you select to cover your short-term insurance, be sure to be honest and accurate, and keep the value of your assets up to date and agreed upon with your insurer. The consequences of over-estimated claims may result in your application being rejected. Should you be under-covered, your insurer might only pay out a percentage of the actual value.

Ensure that your premiums are always paid on time to avoid your cover lapsing. Do an annual inventory of your insured items and confirm that you are fairly but adequately covered. You could lower your monthly investment for your short-term insurance cover by increasing your excess payment or improving the security of your assets.

Who to Turn To

Efficient Wealth should be your answer. Efficient wealth has specifically selected short-term insurance specialists that offer a wide range of cover for yourself, your family, and your assets.

Our knowledge, professionalism, and passion for perfection have been protecting wealth and families since 2003 and are only eclipsed by our passion for people, their wealth, and wellbeing. Consult with Efficient Wealth, we’ll keep you efficiently covered.