2022…Interesting times indeed
“May you live in interesting times” – An old Chinese blessing and curse. If we’ve learnt anything about these past few years is it can likely boil down to this quote too: “Making predictions is hard, especially about the future”
The past 3 years have been challenging from a global pandemic, a war, record global inflation, climate change, financial bubbles, and an ever-increasing load shedding.
The year started off strongly for South African investors as the FTSE/JSE All Share Index hit an all time high of 77,536 index points on 2 March 2022, and the rand reached R14.47 to the US dollar on 30 March 2022. However, the two subsequent quarters saw a massive risk-reversal driven by Russia’s invasion of Ukraine, driving commodity prices higher and giving global inflation a second upward leg driven by supply constraints and price surges. A further driver of risk-off sentiment in the middle of the year was the persistently high inflation in the US as well as the US Fed’s continued interest rate increases. This caused investors to sell long duration assets broadly, with technology stocks and long-dated government bonds entering deep bear markets. Continued weak data from China and the reluctance to deviate from their “Zero Covid” policy further drove bearish sentiment, putting pressure on the rand and local equities. The fourth quarter of the year was markedly different from the two quarters prior as markets were spurred on by a potential nearing of both the inflation and interest rate cycle in the US, as well as positive developments in China. On the local front, markets reacted positively to the results of the year-end ANC elective conference as President Ramaphosa retained his position, but local sentiment was dominated by record levels of load shedding as Eksom’s woes continue to grow.
From a return perspective it wasn’t all doom and gloom for South African investors. While none of the asset classes observed were able to beat inflation in 2022, the late rally in the fourth quarter ensured capital losses suffered during the year were recouped by year end. Global markets didn’t fare as well, with a traditional 60/40 (equity and bonds) portfolio returning -16% in dollar terms as global markets slumped. After many years of strong gains from global investing, it was local assets that drove returns for South Africans in 2022 as both developed and emerging markets suffered losses. In summary, local was lekker in 2022.
2022 was most certainly a busy year for headline writers and news agencies, but do any of the events observed or the market moves suddenly cause one to abandon their investment plan? We don’t think so. As illustrated below, markets fall every single year without fail; sometimes we notice it and sometimes we don’t. While 2022 was event filled and volatile it was by no means a massive outlier in the data. We experienced below average returns and above average volatility. This is stark compared to 2021 where the opposite was true. Upon closer inspection one can see that the average return rarely exists over time, but to achieve the long-term return one must remain invested even though calendar year returns vary from year to year. While volatility drives short-term declines, it also drives long-term return generation. Poor investor behaviour is a bigger risk to an investment than volatility. Emotional reactions during uncomfortable times could lead to poor behaviour at the wrong time and being under-invested when markets eventually recover.
We’ve learnt how quickly things can change over the past few years, and we expect the future to be just as unpredictable. While the narrative in 2022 was dominated by inflation and interest rate increases, 2023 might just be driven by those same factors as well as fears of a global recession, continued loadshedding, geopolitical tension, and many other factors we aren’t aware of today. Trying to make vast forecasts and predictions about events and how they may affect financial markets is impossible, so making big changes across portfolios is something we will be unlikely to do unless driven by fundamental reasons we can observe through all the noise. Stay the course.