Forward looking asset class outlook
Passage of time and the wealth that is generated through a cycle:
This year, I have been talking to you about three main things that dominate this part of our investment cycle. These are the war in Europe, interest rate and inflation through the world. I have sent out updated information on this since the start of year to keep you all well informed of market dynamics.
I was on the phone yesterday with some industry representatives from both the advisory side and fund managers. I had been asking them questions about the forward looking potential of assets. I specifically mentioned that I was wanting to relay information to clients to assist in alleviating concerns and providing forward thinking commentary. I have attached a newsletter from Coronation fund managers which I think is a fantastic read.
I wanted to highlight a few key themes I felt were worth touching on:
Enemies abroad, enemies within:
Investing is a bit like driving forwards but looking through the rear-view mirror the whole time. Essentially, we are emotional creatures and that can be a good and bad thing depending on the situation. We are naturally more inclined to draw from past emotions and to project that forward as some sort of truthful experience. For example, if you bit into an apple and you found half a worm on the other side, that would be very off-putting. Some people may be tempted to think all apples have worms and that it would be best to eat oranges. That thought process is flawed based on one experience. Do some apples have worms, yes, but very far and few between. Most apples are enjoyed without this fear.
Investing should not fall into the driving forward but looking backward bias. I’m sure you will agree that driving forward and looking in the rear-view mirror is both nonsensical and dangerous. The rear-view mirror shows us the things that are behind us that we have just passed, but it doesn’t tell us what’s ahead and how to best use that to have a better driving experience.
It would be best to rather look in front of us to see where we are going and to occasionally look behind us to get perspective on what has been. That is the only real way to drive effectively without crashing.
In the same way with investing, we need to look at where we are now, and drive our investment needs forward looking at future valuations that we want to achieve. In other words, we should be facing towards assets that have the highest probability to deliver the returns we need over the journey that lies ahead.
I have been advising you all over the term that shares/equity is the asset class that is going to drive the best returns and that’s why we use them in different proportions depending on your risk profile.
Don’t let your emotions be your enemy.
Exciting news from Coronation:
I highly regard Coronations economic and share/equity views. They have been very successful over 30 years and have managed capital through ups and downs of all shapes and sizes.
Herewith some takeaways from the above letter.
“When looking back at the first half of 2022, it would be very hard for investors to buy into their fund manager’s optimism about future return prospects. Yet, regardless of where we look across local or global markets – the opportunity set is large. And notwithstanding the many known risks and increasingly unstable world we live in, our conviction levels are high that, with a bit of patience, investors should see strong investment outcomes a few years down the line”.
Essentially echo’s my thoughts to you this year. Yes, there is a hell of a lot of volatility out there, having said that, we still go forward with the asset classes that will give us the returns we need to carry us (in the future).
The markets have dropped to a place where the FUTURE opportunity set is wide and deep, giving investors fantastic forward-looking opportunity. i.e don’t look through the rear-view mirror that was the year past, look FORWARD to the opportunities that are on abundant offer.
When considering local South African shares, Coronation explains the below. (Bearing in mind that after the 2008 world economic crises markets ran over 30%-40%)
“Within the local equity markets, five years of recessionary conditions have created valuation levels that are on par with those experienced in the aftermath of the Global Financial Crisis (end-2008/beginning of 2009). As a result, we’ve seen an incredible depth and breadth of value emerging in JSE-listed shares. Unusually, we are finding value in all three major segments of the local market: the resources sector, SA Inc. shares (e.g. financials, insurers, defensive retailers) and the global shares that happen to be listed on the JSE”
When looking at the global equity side:
“Likewise, after the very indiscriminate sell-off in global equity markets, we also see opportunities across the spectrum. Examples include quality businesses such as Adobe, one of the ultimate software-as-a-service models, that has effectively halved in price, despite the company not experiencing any fundamental changes”.
As I had explained earlier in the year, people do irrational things, like sell quality shares because they panic about world events. On the other side of that trade, are smart investors taking those assets at cheap prices only to sell them at a profit later. That’s why Coronation finds so many great opportunities. Its for this reason we coach out clients to stay put, and allow the fund managers to do this within our client portfolios. That way, we avoid making emotional selling and rather benefit from the fund managers smart buying. This unlocks capital value over longer periods that is far superior to cash in the bank.
Coronation confirms their position on equities:
“The sell-off in both local and global markets has, in our view, created a once-in-a-decade type moment in terms of the valuation opportunity (as is clear from the two graphs below). As a result, our multi-asset portfolios are fully invested in equities. As an example, our flagship pre-retirement fund Coronation Balanced Plus has ~75% in equities (its maximum limit) and holds almost no cash”.
Out of the entire universe of assets that Coronation could hold (of investors capital), they hold almost NO cash and are FULLY invested in equities. In other words, they feel the forward yield curve of equity is far better than cash. All investors need to manage our emotions and practice patience until the markets turn. These are not easy things to do, but a necessary thing to do.
Coronation sees the best opportunities in a decade ahead of us. Hence us saying to clients go through the storm.
NOT TIME TO SIT ON THE SIDELINES
“Owning portfolios that are filled with assets that recently declined in price are never comfortable and goes against one’s natural instincts. Yet, having navigated many unnerving market events for close to 30 years, we know that the only way to grow our investors’ savings into real long-term wealth is to focus on the price we pay for an asset. This means that we need to lean into these dislocations between price and value when they occur and take advantage of the opportunities on offer”.
As we have done and will continue to do (even if sound like a stuck record), we continue to encourage investors to stay in the game and go forward. Don’t sit in the side-lines with cash in the bank, get the money deployed into quality assets trading on cheap levels. Existing investments should just continue though the noise. Provided that this is within your risk profile.
CAUTIOUSLY OPTIMISTIC
‘Markets often turn when you least expect them to and before the concerns that previously led asset prices to decline have been fully resolved. We saw this again recently. After a tough June, when already depressed markets declined further in response to the highest US rate hike since 1994, markets have recovered strongly in July and August, despite another similarly sized US rate hike during this period.
Sentiment often changes with incredible speed and little warning. Yet, being invested before those turning points arrive are the key moments that ultimately end up rewarding the patient long-term investor”.
The reason that it may frustrate some of you for us to stay and go through the storm. Attempting to switch from cash in the bank to the markets is 99% of the time a lost cause. This is why I don’t give this financial advice to clients. Markets can move a few percent each day. How does one to tell if the market is now on its way up or just moving sideways or going down? Its only after successive moves in one direction that indicate a trend, and once this trend has happened you have missed that. Assume you then buy in, you may be buying into the end of that run. Hence we don’t time markets to that degree.
Closing with the above:
2 things are fairly common when going this type of market cycle.
- Banks start suddenly offering high interest rates to lock in capital for long periods of time on notice deposits.
- People are tempted to think that everything will crash and burn.
The above shows over 72 years of data. The following:
- The markets have crashes 37 times over this time for various reasons including wars.
- That over 20 years, if people had just stayed invested through the ups and downs, that they would have had the best outcome by far.
- There are roughly 7300 days in 20 years. If investors missed the best 10 days in the market out of 7300 days, their returns halved. That’s 0.14% of the time period in question. This is why I don’t attempt to time markets. What are the chances that you are anybody else can time it by 0.14%?
- If you missed the best 40 days in 7300, you didn’t even break inflation. You wasted your time.
Why are the banks offering you such high long-term interest on deposits all of a sudden? Because they know that the forward-looking opportunities outweigh the interest they are going to be paying you. Simple as that. the banks know they can do better than the rate they are offering over the term, otherwise they wouldn’t offer those rates. We see this time and time again on the back end of market cycles. I have been in planning for 17 years and I don’t know anybody that go wealthy of bank interest over the long term. The above graph shows that after every major recent living memory war, markets did very well in the subsequent period.
Conclusion:
I think that that we are living in challenging times. I think the challenges are here to stay for a few years. I believe that investors should invest forward with the best opportunities that lie ahead and not be dissuaded by what’s in the rear-view mirror. I have been preaching to you that no matter if we need to sit in the fire for a few more months, that a diversified portfolio that holds various levels of equity will give solid results.
Coronation have written their compelling argument and put their (and other people’s money) where their mouth is.
I have been giving you the same level of encouragement for months but am very happy that others are venturing their opinion along similar lines. I have included quality information to back up the encouragement and to try strengthening the case for those who may be feeling discouraged.
Thank you all and have a wonderful week.
