What 2022 holds for investors, what to expect and what to look out for

It would appear that this time around, inflation may be with us for longer, although central banks are under pressure to ensure it does not spiral out of control. Locally, the South African Reserve Bank has raised interest rates by 0.5% since the bottom, and indicated it will continue with this trend every quarter for the next two and a half years.

High inflation can squeeze company profits due to higher input costs. Under these circumstances, companies may hire less, which has an impact on the standard of living. Historically, high inflation has correlated with lower returns on equities.

PSG Wealth continues to favour equities over the long term (especially given inflation risk) but believes investors should make provision for their cash needs, so that they are not forced to access investments in times of volatility. PSG Wealth’s view on markets and asset classes in the next economic cycle can be summarised as follows:

• We see a change in direction in global interest rates, which are expected to move higher. These increases have not been factored into the markets yet.
• Rising interest rates will negatively impact US bonds, offshore property and equities. It is important to note that some sectors (e.g. banking shares) will be affected to a lesser extent by rising interest rates.
• Investors should expect more volatility in the market in the short term.
• Emerging markets (including SA) are expected to do well over the next two years, although developments in China should be monitored closely.
• Investment outcomes in SA should be better than in global markets, given the depressed valuation levels in large portions of the local market as well as higher commodity price drivers.

Governments, and the US Federal Reserve in particular, will probably aim to keep interest rates as low as possible to promote economic growth. It is our view that investors can expect domestic equity returns of between 9% and 15% per annum over the next 10 years. This relates to inflation plus 8% on average returns.

PSG Wealth’s view is that offshore markets will deliver returns of between 3% and 6% above inflation per annum over the next 10 years.

In summary:

During periods of inflation, is paramount that the purchasing power of clients’ portfolios remains intact. In other words, that the impact of higher inflation is taken care of by sufficient growth assets in clients’ portfolios. As an inflation hedge, risk assets or equities play an invaluable role in portfolios. Unfortunately, the inherent nature of equities is not to move up (grow) in a straight line, as is the case with cash. Volatility is in the nature of equities, and if investors can understand this, the journey from A to B may be a more “acceptable”  experience.

In the tables below we have highlighted the risks and opportunities as we view them:

Source: PSG Wealth

We trust that this year will be a really good and abundant year for you and your family. May you experience good health, also making taking time to connect with your loved ones.  Rest assure that your investments are in good hands, and that we stay committed and passionate to manage them on your behalf and in your best interest.