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WINDS OF CHANGE

by | Feb 1, 2022

Have the winds of change begun to blow? After living with Covid for approximately two years now the latest variant i.e., Omicron seems to “hopefully” be playing itself out. The fourth wave is safely behind us providing some much-needed relief to the hospitality, travel and tourism industries and the economy in general. We are even hearing of the possibility that the pandemic may be reclassified down to an epidemic.

Despite the impact of Covid, the markets have rebounded strongly over the past twenty-one months and delivered fantastic results. After falling 34% in just 16 days the markets rebounded in just 115 days and are now trading near record highs. Moral of the story, stay the course!

However, while the pandemic pressure subsides, we see new winds blowing across the bows, i.e., geopolitical, local politics and economic.

Geopolitical tensions between Ukraine and Russia have global markets on their toes. Tensions between Ukraine and Russia are at their highest in years as Russia builds up its troops and armaments along the two nations border with ever increasing fears that Moscow could launch an invasion.

NATO allies, fearful of a Russian invasion have stepped up support for Kyiv by sending additional troops and military equipment to Ukraine. The Pentagon has put 8,500 US troops on standby and NATO is sending ships and jets to bolster the regions defences.

So why the conflict? Ukraine was part of the Russian Empire for centuries before becoming a Soviet republic and won independence when the USSR broke up in 1991. Ukraine has shed its Russian imperial legacy and forged close ties with the West. In addition, Ukraine aspires to join NATO which Putin is strongly against.

What does Russia want? Russia does not want Ukraine to be part of NATO, and for NATO to withdraw from Eastern Europe.

An escalated conflict would likely further increase energy costs and commodity prices for many countries, keeping inflation rates elevated for longer. Hopefully sanity prevails and a workable solution for all parties can be found sooner rather than later. After Covid’s economic damage we can ill afford an armed conflict in Eastern Europe especially involving a Superpower!

Local Politics

2022 is set to be a bumpy ride, particularly for the governing party. After a humiliating showing at last year’s municipal elections the start of 2022 has been disastrous for the ANC. The Zondo report has exposed the ANC as a criminal enterprise and hopefully with everything out in the public something will finally be done. It is crucial that people are held to account in order to dissuade would be perpetrators from continuing to plunder state coffers. The ANC’s woes continue unabated, with funding issues resulting in non-payment of staff to most recently the SIU’s report that 62% of Covid-19 related government procurement was found to be irregular.

On top of this lobbying for the next ANC president has already started. Hopefully Ramaphosa succeeds and secures a second term as party president at the upcoming elective conference in December. It is crucial for SA that Ramaphosa wins and continues with his unity and renewal agenda in the governing party leading into the 2024 national elections where it will face its toughest electoral test since 1994. Expect a wild political year with the RET faction trying everything to unseat Cyril.

Economics and Financial markets

It has been a rough start to 2022. Equity markets have been under pressure as the US economy, as well as countries all over the globe, face multiple interest rate hikes. Higher interest rates can cause both businesses and consumers to cut spending, which negatively impacts equity markets. In order to curb inflation, the US Central bank has moved from a system of easy money to that of a tightening policy. This mounting inflationary pressure and the hawkish shift of Central Banks results in rising global yields and hurts stock valuations. Increasing interest rates directly impacts the exchange rate, this attracts foreign capital and with it, currency appreciation.

So, what is one to do, besides trying to avoid all this noise….

Diversification

Having a diversified investment portfolio is one of the longest standing principles when investing and is the key. Diversification allows investors to reduce the risk in their portfolios by spreading your capital amongst various investments so that you don’t have to rely on a single investment for all your returns, and this can all be done without reducing the return in the portfolio either.

Contrary to belief, portfolio diversification works best when markets are going up and operating normally as opposed to financial crisis and bearish periods; Portfolio diversification provides less reduction during market turmoil such as in 2008 where correlations tend to increase between funds and asset classes which reduces the benefits of diversification. So, when markets fall, panic hits the market and investors turn to their gut instinct and sell as quickly as possible to recoup losses, this only exaggerates losses and all riskier asset classes tend to follow this theme which is what causes broader losses as we have seen in previous corrections.

Due to decades of incorrect use, investors only use diversification when it suits them, as they try and time the markets by moving in and out of certain funds/shares when markets are going up or down. But the reality is that it’s a principle to be used consistently irrespective of up or down markets.

There are some key benefits to diversification:

Firstly, to minimize the risk of losses – if one investment performs poorly over a certain period, other investments may perform better over that same period, reducing the potential losses of your investment portfolio from concentrating all your capital under one type of investment.

Secondly, to generate smoother returns – the blending of different assets or funds won’t give you the best return all the time, but it enables a much smoother ride when compounding your returns over the long-term.

Thirdly, to preserve capital – rule number one, don’t lose your money; rule number two, don’t forget rule number one!

Fourthly, the use of different investment vehicles – to diversify your portfolio, you need to spread your capital across different asset classes and geographies to reduce your risk.

Our Portfolio’s

Together with Morningstar we have established a range of investment portfolio’s that facilitate active management of our client’s portfolio’s. This follows a strict process whereby investments are managed by an Investment Committee of specialists with proven track records. We aim to achieve an appropriate degree of diversification which delivers strong returns whilst at the same time offering protection on the downside.

All portfolios are subjected to rigorous qualitative and quantitative analysis when selecting underlying unit trust funds. The Portfolio’s are managed to meet the needs of end investors while taking the investment landscape into account. Our model portfolios provide you with many benefits in terms of flexibility, liquidity and transparency. We negotiate reduced fees on the underlying funds where possible to ensure that our clients benefit from cost-effective portfolio’s.

2022

  • Market volatility is expected and is normal, so be patient and stay the course
  • Although lower returns are expected we remain confident and are well positioned to protect on the downside as well as prosper on the upside
  • ANC election campaigning has begun, ignore the political noise
  • Diversify your portfolio AND ensure you continue to build up an offshore portfolio

Wishing you all the very best for 2022

Quinton & the RWM Team