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Tiptoeing into 2022…investors are asking “Where do we go from here?”

In the United States, 2021 ranked as the ninth lowest peak-to-trough withdrawal in a calendar year over the past 94 years of data. That’s quite an achievement, given that 2021 has by no means been a boring year – global bonds bottomed, we saw the Evergrande debacle unfold, Chinese tech stocks crashed, and then the contagion of all this to emerging markets.

Fast forward four months into 2022 and we’re back to a time when market volatility and uncertainty are the order of the day – and to say 2022 has been volatile would probably be an understatement.

Investors are going through a period where everything seems to be going up (and not necessarily in a good way) – inflation, interest rates, oil prices and geopolitical tensions to name a few. Naturally, customers ask “Where to go from here?”.

If we look at the returns of different asset classes in the first quarter (year-to-date) of 2022, there are a few points that stand out:

Morningstar Investment Management

1. Local is lekker – to change

In the first three months of the year, we have seen global equities fall 13% in rand (5% in USD) against South African equities which are up 4% in rand. This represents a performance gap of 17% in rand terms in just three months.

There has been a lot of positive news from South Africa recently. South African manufacturing sentiment hits highest level in nearly 23 years, national state of disaster ended after 750 days, Moody’s revised South Africa’s outlook from ‘stable’ to ‘negative’ (stating that our fiscal position has “significantly recovered”) and the South African Reserve Bank (SARB) broke a revenue record, collecting over R1.5 trillion in net tax revenue (an increase of 25. 1% compared to the previous year).

Read: Sarb Rejects “Heads You Win, Heads We Lose” QE

Energy supply disruptions in Russia and Ukraine due to the ongoing conflict, combined with sanctions and boycotts against Russia, have driven up energy and commodity prices (namely oil and gas) .

Rising commodity prices have impacted our local commodity trading posts and the South African resource sector has benefited from these higher prices (up nearly 19% on a year-to-date basis). the year).

Favorable terms of trade have also been the main reason the rand has been so strong against other emerging market currencies (see chart below), and much of our currency’s volatility is the result commodity price volatility.

Source: Morningstar, Clearnomics

While some of the easy money in local equities may have already been earned, we still see good value in certain stocks and areas of the market like resources and financials.

2. Volatility persists in fixed income securities

Fixed income managers have not had an easy year in 2021. What seemed like a stable (and dare we say ‘boring’) asset class was no longer so, as 2021 saw income assets fixed experience great volatility. This continued into 2022; over the past quarter, global bonds suffered their worst decline on record as US bonds had their worst quarter since the 1980s.

Listen to Ryk van Niekerk’s interview with Sasfin CIO Arno Lawrenz (or read the transcript here):

Global inflation was expected to decline as economies began to recover from the pandemic, but rising energy and food prices (due to supply disruptions in Russia and Ukraine) continued to hurt. drive up global inflation. Since adjusting interest rates is one of the few mechanisms to curb inflation, central banks around the world could consider raising and/or continuing to raise short-term interest rates. term.

This may alarm bond investors since market interest rates and bond prices generally have an inverse relationship (in other words, they move in opposite directions), which means that higher interest rates generally cause bond prices to fall. That being said, for bond investors, it’s a short-term pain for a long-term gain. Higher returns mean higher future returns.

While rising interest rates will cause the value of short-term bonds to decline, the declines will ultimately be more than offset as the bonds mature and can be reinvested for higher yields.

South African bonds are an asset class that we have been watching for some time. Our government bonds offer investors a yield of around 9.5%. Compare that to cash where you can get 4% in the bank, while inflation is currently 5.7% (and rising).

Simply put, you are being offered a real return of over 3.5% on South African government bonds versus a near negative 2% real return on cash. Yes, government bonds are more volatile than money market instruments when viewed in isolation, however, when held in a portfolio of foreign equity and assets, South African government bonds offer a healthy yield and the potential for capital gains if yields drop from here.

3. In global markets, the tide has turned

The MSCI World Index is down around 14% year-to-date (as of March 31, 2022, in rand). Value stocks and unloved sectors of the market (such as energy and UK equities) certainly rebounded and were strong contributors to portfolio performance (as seen in the chart below). On the other hand, we have also seen previously high-flying segments of the market – such as growth stocks and technology companies – come under pressure.

Source: Morningstar, Clearnomics

The overweight in emerging markets has detracted from performance over the past 12 months as well as in the last quarter. Sentiment towards emerging markets turned sour towards the end of 2021 when the Omicron variant of Covid-19 was discovered alongside the Chinese implementing new regulations that materially impacted certain sectors.

Emerging markets are among the most attractive regions of our investment universe and while we recognize the volatility that this asset class as well as emerging market currencies can bring, we must remember that emerging markets are heterogeneous and that we still see good pockets of opportunity in this sector of the market.

We think a small dedicated allocation to emerging market equities in more aggressive portfolios is appropriate.

The importance of building strong portfolios

Given the current market environment, investors face great uncertainty in both local and global markets as we navigate 2022. The most powerful hedge against market volatility and uncertainty is diversification across within portfolios.

stay invested

Even though it feels like the world has been turned upside down (again!) with a second black swan in just two years and a lot of uncertainty in the markets, the basic principles of investing remain constant.

Markets are and always will be complex. There is a continual oscillation between euphoria and depression and/or celebration of the positive and obsession with the negative. Markets are inherently unpredictable in the short term and governed by factors that no machine or person can accurately predict.

Take a long-term view of your investments and ensure your portfolio is diversified to withstand the bursts of volatility that can occur in the short term and accept that you will find very little benefit in trying to predict the future of day to day.

Patience, persistence, good saving habits and a sense of worth will help you achieve your financial goals.

Debra Slabber is a portfolio specialist at Morningstar Investment Management SA.