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BOLD BEHAVIOUR IN A BRAZEN WORLD

by | Jun 1, 2022

For once, it’s not just us at the tip of Africa.

Across the globe, inflation is raging, gas prices are soaring, food prices are spiralling and the cost of living is drowning many in debt; this has been further exacerbated by the war in Ukraine and fanatical Chinese lockdowns. Whilst central banks expected inflation, Ukraine and China intensified the situation.  Fear fills the air.

Markets have not ignored this chaotic commotion.  Everything’s been shattered – equities, bonds, tech, crypto, Russia, China – and there’s nowhere to take refuge.

As humans, we like certainty, and yet markets are anything but, especially when looking at the short- term price movements.  Whilst this year has been filled with exquisite turmoil, random returns and inexplicable investment outcomes, it’s important to remember that we have been here many times before, and although it doesn’t feel like it at the time, it is a natural and healthy element of long-term market returns, essentially cleansing out the system.

As every shadow has its sunshine, there’s good news and bad news. The good news is that no financial asset goes up or down forever.  Things will stabilise and eventually revert to fair value. The bad news is it may take a while. The two primary drivers of where we find ourselves are showing no signs of abating:  Vladimir’s war in Ukraine and Xi Jinping’s extreme overreaction to Covid, inflicting mayhem on supply chains and growth worldwide.

What is required of us as investors is a resilience, and a bold understanding of what it is we can control, letting go of the angst of trying to control short-term investment returns, often at our own expense.  Markets reward the patient investor.

What to do about short term volatility?

Markets are inherently unpredictable in the short term; the range of outcomes is extensive and investors have very little advantage in trying to predict what will happen from one day to the next.  In trying to time the market, investors typically try to avoid losses by chasing returns, selling low – realising their losses – and buying high, at an expensive price.  In fact, statistics show that investors are largely guaranteed to destroy value this way, not allowing their investment strategy to play out as intended, resulting in a behaviour gap.

The chart below illustrates the range of possible outcomes over any rolling one-year period per asset class that is broadly investible from a rand perspective. The green dot is the average annual one-year rolling return per asset class. What is quite evident is that the variability in returns is far greater than one would think. Emerging market equities, for instance, have gone from -40% to +60% in one year, giving it a 100% variability rate. That is rather thrilling!

Source:  Morningstar Direct March 2022

What about the long view?

If you look at the same graph, but on a rolling 10-year basis instead, the picture looks materially different. Two observations that can be made from the graph below:

  1. All asset classes are positive over any 10-year rolling period.
  2. The variability in returns is drastically reduced.

Source:  Morningstar Direct March 2022

Taking note of the above, whilst markets are impossible to predict in the short term, they are more foreseeable over the long term, the reason being that the price of securities is ultimately driven by fundamentals (earnings growth, inflation, starting valuation). This is why our specialist investment partners at Morningstar spend very little time trying to predict the near-term future, avoiding wasted time on forecasting geopolitics and macro factors.   This non-renewable resource – time – is better spent in understanding the fundamental drivers of companies, sectors, asset classes and regions through their robust Capital Markets framework.

Taking this same concept offshore, let’s look at the S&P graph (in USD):

The first graph below shows the cumulative growth of $100 invested in the S&P back in 2000, while the second shows the pullbacks we’ve seen over the same period, similar to what we are experiencing now. As previously mentioned, this has happened many times before and these sharp drawdowns are a healthy cleansing of the system.  Whilst equity markets trend upwards over time, they do not do so in a straight line. The lesson from history for long-term investors is to stay invested.

Source:  Morningstar

So, back to us.  Whilst markets contain a strong element of randomness and unpredictability, both of which are beyond our control, the power lies in our ability to take the emotions out of investing and to stay the course.  We as your advisor, together with Morningstar, are constantly researching and actioning opportunities throughout this period, positioning your portfolios for the long term, so that you can spend your time on the things that matter. Living life.