Staying calm during the market storm
F&A Monthly Update | May 2022
As Brendan covers in his piece below around composure, and as is shown in the monthly commentary too, markets are under pressure. Periods of uncertainty create doubt even when we know the discipline and resulting process that is required to show positive long-term results. As uncomfortable as these periods are, they are in fact where some of the greatest buying opportunities present themselves, and so being able to weather these periods allows our specialists the time and trust to pick and choose positions which will be rewarding in the long-term.
As always, we are available to chat! Please see the superb pieces from Brendan, below.
Why it’s important to remain composed when markets are tough
This piece is compiled by Brendan de Jongh, SA Head of Research - PortfolioMetrix.
The first half of 2022 has been characterised by higher than usual uncertainty resulting in a selloff in markets. The key reasons for this are:
INFLATION RISK:
Inflation has continued to surprise on the upside and has reached levels we have not seen in decades.GEOPOLITICAL RISK:
The Russia / Ukraine war continues, exacerbating inflation risk but also generally raising alert levels because a nuclear power is at war.CENTRAL BANK POLICY RISK:
To quell inflation, central banks globally have embarked on aggressive monetary tightening by raising interest rates. This coincides with the unwinding of central bank balance sheets through quantitative tightening.ECONOMIC GROWTH RISK:
Fears of inflation and monetary tightening, if overly aggressive, pose a risk to growth.
The re-pricing of assets has been swift. The future looks more uncertain, and this elevates the riskiness of future cash flows.
WHAT ELSE DO WE KNOW?
Risk is the reason why excess returns (returns above cash) are available. It is uncertainty that causes assets to be priced at a discount so that investors can expect to be rewarded for taking that risk.
Assets with unchanged prospects can be bought at significantly discounted prices compared to more elevated levels a few months ago.
Volatility is normal. Every year has its rough patches that test investor resolve, but despite this calendar year performance over the last 42 years on the S&P500 has ended positive 75% of the time
[1] Based on S&P500 returns in USD over the last 42 years.
The US 10-year yield has moved from 1.5% to 3% this year. This means that an investor investing in this instrument would earn twice as much today than they could have earned 6 months ago.
Volatility should not derail a long-term asset allocation. A well-structured plan can aid in weathering volatility and limit emotionally driven reactions. It is at times like this that the greatest investment opportunities arise.
Market timing has proven to be damaging to the average investor because of behavioural biases that lead us to buy high and sell low. At PortfolioMetrix our objective is to maximise the returns we capture from the market over the long term and part of that process is to remain invested during the uncertain times. Traditionally, the average investor has paid a hefty price as they have fallen prey to the so-called behaviour gap:
June 2022 Update
This month's piece is compiled by Brendan de Jongh, SA Head of Research - PortfolioMetrix.
LOCAL UPDATE
The risk off environment did not bode well for local risky assets. SA equity and property as well as the rand had a tough month, falling in line with the risk-off sentiment. SA bonds lost 3% in June, mostly in the last week of the month. The only two asset classes providing protection came from local cash and global bonds in rands. The strong selloff in SA financials and resources stocks dragged down the broader local equity market. The industrials super sector was held up by strong performance in the Naspers / Prosus stable as Chinese equities in general held up relatively well over the month.
GLOBAL UPDATE
Although the global equity market ended the month relatively flat there was significant intra-month volatility as markets initially fell 6% to mid-May, only to recover this by the end of the month. The key macro risks of war in Ukraine, tightening monetary policy and Covid restrictions in China remain, and markets lacked a clear catalyst for a change in sentiment. In an environment dominated by fears of recession or runaway inflation, heightened volatility has become the norm with severe market reactions playing out at a company level. Central banks are continuing to grapple with inflation. But they are now even more conscious of rising growth risks, which remain higher in Europe than the US. Labour markets remain tight but with real wage growth negative the squeeze on consumers remains. The slight uptick in global equity markets was accompanied by positive global bond returns, however commodities remained the strongest asset class.