PSG Wealth Northcliff Newsletter: December 2021

The post-pandemic recovery presented its own challenges with vaccination rates of emerging countries lagging those of developed countries, causing bottlenecks in energy prices in particular, and impacting inflation numbers. Supply chain challenges are cited as one of the major risks for future company growth, according to a McKinsey global survey. A positive finding of the survey is that respondents expect their companies to emerge from the pandemic more resilient than ever before. More than three-quarters of the respondents said their companies are more prepared for future crises now than they were before the pandemic.

The pandemic has also impacted our social constructs that are being reshaped, with the pandemic requiring us to, for example, limit human interaction, wear masks and work from home.

As illustrated in the chart below (Old Mutual Investment Group, October 2021) we have seen a robust economic recovery, also given the extraordinary fiscal and monetary support unleashed by governments since the pandemic started.

Reflecting on the pandemic, we are reminded that equity investments are a future-facing endeavour, meaning that investors will invariably be confronted with uncertainty. This uncertainty is engrained and part of the ‘DNA’ of equities, and if well understood, will make the journey for investors more tolerable.

The challenging political and economic landscape in SA need not be amplified with Eskom taking the centre stage, closely followed by the financial woes and service delivery of other SOEs . The recent local elections have demonstrated that voters are running out of patience with the governing party.

From an investor perspective, we remind you that our local stock exchange (JSE) is more aligned to emerging markets (EMs) than to our own local political and economic situation. Local asset managers are by and large in agreement that investors can expect a much better ride, so to speak, the next five (years compared to the five years until November 2020. The graph below from PSG Wealth - CIO Adriaan Pask (December 2020) suggests that investors can expect returns of approximately 12.5% (base scenario) from domestic general equity.

What investors can expect going forward

The coronavirus and the new variants will unfortunately still be with us for some years to come, according to most leading specialists in the field. These new variants may again derail the recovery, but considering the above we expect the domestic equity market to do well in the next five years.

On the global front, the bull market in the US is still intact with global companies still thriving, but lower returns are expected (5% for the next 12 months) according to Anchor Capital (October 2021). There are pockets of US technology stocks where there is valuation risk (high PE ratios), according to Adriaan Pask, and our advice to investors is to expect lower returns from offshore equities during the next year or two, compared to the last couple of years. For this reason, it is important to be more cautious and selective when choosing offshore equities and funds.

The rand has been under pressure against offshore currencies over the last month. Our valuation of the rand vs US dollar PPP (purchasing power parity) is currently around R14,50 to the dollar. As we have seen from the SA Reserve Bank’s response we are in an upward cycle with interest rates, and the expectations are that Governor Kganyago and his team will probably increase interest rates by 25 basis points every quarter for the next three years.

Inflation risk – locally and abroad – will impact the equity markets and may be with us for a lengthy period. We have further seen a tighter regulatory environment in China and growing concerns about the health of their property market.

In summary

As mentioned, change and uncertainty are unfortunately key ingredients in long-term investing. This brings opportunities for investors, and at PSG Wealth Northcliff, our portfolios are constructed to take advantage of opportunities whilst ensuring we diversify your portfolio by country, sector and industry. For this reason, you can rest assured that you are in safe and very capable hands.

We would like to wish you and your family a blessed and prosperous festive season and we look forward to our partnership with you in 2022.