Looking through the noise and seeing the wood from the trees!

It’s easy to be bearish when bears appear …

There has been an incredible amount of volatility in the year to date, with markets unnerved by the unknown paths of the war in Ukraine, the ongoing supply chain issues brought by COVID-lockdowns in China and an aggressive central bank policy trying to tame inflation. All these factors have exacerbated concerns around global growth, which has already been slowing coming out of the post-COVID recovery. The market is pricing in a lot of bad news, which is reflected in the performance of all major asset classes, as the chart below shows.

We try to look through the noise and the bad news projected to focus on the changing fundamentals. There are certainly fundamental indicators that concern us and that raise red flags on the trajectory of global growth over the next two years. However, our view is that a sharp reversal of the economic momentum coming out of the recovery is low, and that there are probably more gains to be had from being invested in risk assets like equities over the next 12 to 18 months. While the concerns by investors amid all the uncertainty is understandable, the markets may be discounting a bit too much bad news given the changes to the underlying fundamentals.

Looking beyond our less gloomy outlook for the markets, there is another major reason why investors should stay the course and remain invested. This reason is that, over time, the market rewards those who stay invested, in both good times and bad. This is best demonstrated in the graph below. The graph shows data going back to 1928, depicting the 58 worst drawdowns experienced in the history of South Africa. In essence, what the chart observes is that in most of the drawdowns experienced, the following 12 months of recovery more often reward investors for staying invested.

When reviewing the same analysis in tabular format, the observations become more evident, especially when observing all the periods on aggregate. Table 2 below highlights that, on average, the drawdowns experienced over these 58 periods was 15.3% and took just under 8 months to transpire. Had you stayed invested for the next 12 months, you would have received an average return of 24.3%, which is better than the breakeven required of 21.7% (the return required to recover the 15.3% drawdown). The market expected this recovery to occur under 2 years, but it actually happened in less than 8 months on average. The key takeaway from this table is that investors tend to make more back in the twelve months following a sell-off in markets, provided they remain invested.

While the sentiment towards risky assets such as equities, both locally and globally, is quite negative, it may be tempting to become risk averse and switch out of equities and into lower risk asset classes such as cash.  However, time has shown that investors are better off resisting the temptation to sell out of their long-term plan, and not reacting to short-term market movements.

If you stay invested over the long term, on average, the outcome is usually better than the market losses experienced in the short term. The skill is to ensure that you have the correct underlying strategies to navigate this volatility over the long term and to stay the course. We are constantly reviewing our investment strategy and the asset managers who we appoint. It is important that the underlying funds will assist in meeting the objectives of our clients (with acceptable risk tolerance) and help navigate the current and ensuing market conditions over the long term.