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.

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!