2022 HAS BEEN A VOLATILE YEAR THUS FAR. THE FOLLOWING EVENTS CONTRIBUTED TO THIS VOLATILITY:
- The war in Ukraine
- Rising inflation
- Higher interest rates
- Lockdowns in China, owing to COVID
Whilst global economic growth remains strong and global unemployment remains low, the markets fear that global central banks will raise interest rates too quickly resulting in a recession. Conversely, not raising interest rates enough might allow inflation to become entrenched.
It is easy to be consumed by the negative market sentiment, but it is essential to zoom out and to have a look at the bigger picture. The graphs illustrate that, despite the many recessions and bear markets, equities comfortably outperformed inflation over the long term. Sell offs are normal. On average, the United States (US) equity market (S&P 500) lost 16.5% during a calendar year from 1928 to 2021. Despite these drawdowns, the average calendar year performance was 11.8%. The risk (volatility) of equities decreases as the investment horizon increases.
SOME GLIMMERS OF POSITIVE NEWS ARE:
- China finally began to ease COVID restrictions:
+ This will ease the supply constraints resulting in lower prices
+ The re-opening will support economic growth
- Support for commodities will benefit South Africa (SA):
+ China is starting to implement infrastructure spending
+ The ongoing war in the Ukraine will limit the supply of commodities
+ The transition to clean energy will increase the demand for base metals
- SA equities are cheap:
+ The upside to fair value is substantial
- SA bonds offer attractive yields of >10%
- SA cash will improve as interest rates rise
- The weaker SA rand provided some protection for global asset classes
The volatile market conditions create opportunities for active managers to buy quality companies on a sale. Over the long run, one of the most reliable factors that drives investment returns in equities is the ability for companies to grow their cash earnings for extended periods of time. Companies that remain dominant in a sector and have business models that deliver high margins, fitability and strong cash flow that they can invest for growth, are essential in a market with many uncertainties, such as higher inflation and interest rates. These companies should have the pricing power and margins that are large enough to withstand increases in input costs.
We encourage investors to speak to a financial advisor before making any changes to their portfolio, as a hasty decision can result in a permanent loss of capital. Market timing is risky. It is, therefore, essential to remain invested and to follow your long-term financial plan. Time is required to unlock the value of equities.