How to navigate through the current market volatility

The MSCI All Country World Index (an index designed to track broad global equity market performance) has declined by 14.7% from 1 January 2022 to 31 May 2022, and the FTSE/JSE All Share Index (ALSI) by 0.3% (Bloomberg). The key factors that have weighed on markets are global inflation, the Russia/Ukraine war, and Chinese growth and lockdowns. Understandably, this market volatility and plummeting share prices are a concern for investors.

The US CPI (Consumer Price Index) inflation rate unexpectedly accelerated to 8.6% in May 2022, the highest level since December 1981, and exceeding market forecasts of 8.3%.

Markets need and want to see inflation coming down – a sentiment that is clearly echoed by the central banks. Supply chain disruptions caused by Covid, and more recently by the Russia/Ukraine war, have exacerbated the situation. The fact that goods are not getting to businesses and people leads to higher inflation. On the demand side and referring to the US economy, consumers are in a strong financial position resulting in demand to surge amidst supply challenges. This has further fueled inflation.

The surge in the prices of crude oil and other commodities resulting from the war has boosted gasoline and food prices. The US Federal Reserve (the Fed) hopes to tackle high prices and reduce demand by making it more expensive to borrow money. In June, the Fed announced that it will increase interest rates by 0.75%. Further to that, the Fed started to reduce the size of its balance sheet (notes and securities) to combat and curb inflation.

The graph below reflects CPI figures in the US since the 1980s.

Graph 1: Inflation not seen since the 1980s

Source: Coronation, June 2022

Before equity investors become too alarmed, please bear in mind that the growth shortfall is already embedded in stock prices to a large extent. Across the board – whether looking at Chinese or US technology stocks – share prices are down between 30% and 60%. The market got carried away painting everything with the same brush.

Of course, not all stocks will see a rebound, such as some tech shares, but it is important to consider the upside potential of those businesses that are actually profitable. Businesses that are able to continue growing in this tough environment are going to become very valuable in the marketplace in the next 3 to 12 months (Clyde Rossouw, Ninety One, June 2022). While it has been a difficult time for investors, and factoring in the current volatility in the market, we at PSG Wealth are excited about the opportunities that we see on the horizon.

In economies where liquidity is scarce and will be for the immediate future, it will be important to consider businesses’ ability to generate cash flows and profits, and whether companies need access to capital, which is becoming far more expensive.

Let us contextualise the crisis and reflect on previous so-called crisis events. It is paramount that investors realise that the nature of equities is to respond quickly to external events and, in the current scenario, to bounce back quickly. Below are statistics from Coronation (June 2022):

Table 1: Statistics from Coronation, June 2022

In summary:

In our newsletters and advice, we have previously alluded to themes like ‘staying invested’, ‘time in the market versus timing the market’ and ‘chasing past performance’. Adriaan Pask, Chief Investment Officer of PSG Wealth, believes the next decade may look materially different to the past decade, especially against the backdrop of higher inflation and interest rates. We will probably see a premium for quality companies that can provide solid yields in a high interest rate environment. We are of the view that emerging markets and our local market will provide better real yields over the short and medium term compared to the US (Adriaan Pask). The graph below illustrates this with the Price to Book (PB) valuations of SA equities vs global equities:

Graph 2: SA equities far cheaper than Global equities

(Price/Book value FTSE/JSE/ALSI vs MSCI All - Country World Index)

Source: Datastream, Bloomberg 4 April 2022

As Warren Buffet commented, “Time is the friend of the wonderful company and the enemy of the mediocre one.” Our own emotions during times like this would suggest the market will not recover, but rest assured – it will. At PSG Wealth Northcliff, we are committed to managing your investment with care, diligence and wisdom. Please stay the course and be assured that we have your best interests at heart.

Office news:

Our stockbroker in the office, Bert de Klerk, has decided to retire end of August 2022 after a longstanding and sterling career at PSG Wealth. Bert has been instrumental in the success of the PSG Wealth Northcliff office, and we are surely going to miss him a lot. We are fortunate to announce that Fraser Muller, currently Head of Institutional Trading, will be joining our office from 1 September 2022. Fraser is a proper local boy, as he went to school in Linden and completed his BCom degree and Postgraduate Diplomas (Investments and Financial Planning) at the University of Johannesburg and Milpark Business School.

The opinions expressed in this article are the opinions of the writer and not necessarily those of PSG and do not constitute advice. Although the utmost care has been taken in the research and preparation of this article, no responsibility can be taken for actions taken based on information in this article. Always remember the prudent way is to consult your portfolio manager before investing.

PSG Wealth Financial Planning (Pty) Ltd is an authorised financial services provider. FSP 728