Constants and variables

Located on the Acropolis hill, it was erected 2 500 years ago without any foundations. Yet it still stands, having weathered several earthquakes and wars with the enemy seeking its destruction.

In the investment world, there are also principles that have stood the test of time and are still valid, irrespective of the market environment. Let’s take a look at some of these principles.

1. Asset allocation:
Studies have shown that about 80% of your portfolio returns are determined by the asset allocations within your investments. The Smartie box below illustrates the annual returns on South African assets since 2013, demonstrating the principle that it is impossible to pick the winner every year. Diversification ensures that you always have exposure to the next year’s outperforming asset class.

2. Correlation between risk and returns:
Low-risk asset classes yield low returns while high-risk asset classes deliver high potential returns. The graph below reflects the performance of the South African asset classes since 2012. Cash delivered the lowest return over the period, but without any volatility. Equities delivered the highest return, but at a much higher risk.

3. Time in the market vs timing the market:
Peter Lynch said:
“People who exit the stock market to avoid a decline are odds-on favourites to miss the next rally.”

The graph below demonstrates that 46% of the 50 best days on the S&P 500 since 1980 occurred in a bear market, and a further 24% in the first two months of a bull market. So, if you sold your shares in the bear market you will have missed out on 35 of the 50 best days in the market.

4. Investment horizon:
It is critical to ensure that your investment horizon and your risk profile are synchronised. If you draw an income from your investment, it is important to understand that different parts of your funds will play a pivotal role at different times. As a result, your investment plan should take account of these horizons:

We divide them into three categories: 1-3 years, 4-7 years, and your long-term funds.

5. Bull and bear markets:
Since 1928, the S&P 500 has experienced 24 bull markets (markets rising by more than 20%). Over the same period, 22 bear markets were recorded (when markets are down by more than 20%), as well as 33 further corrections (markets declining by more than 10%). Nevertheless, the market achieved an average annual return of almost 10% over this period. John Templeton said:

“There will always be bull markets, followed by bear markets, followed by bull markets.”

Looking into the crystal ball, I would like to zoom in on things we believe will change the world and where we invest over the next few decades:

1. Cyber security:
Expected losses as a result of cybercrime is projected to amount to US$10,5 trillion by 2025. This is more than the GDP of Japan, the third biggest economy in the world. In a recent survey, 44% of the participants indicated cybercrime as their biggest business risk. In 2020, the big five US tech giants spent US$549 million on cyber security. By 2021, the expense amounted to US$2,4 trillion.

2. Climate change:
Climate change is projected to reduce global economic output by VS$23 trillion. Around the globe, massive amounts of money are spent on research into green energy to reduce the impact. Renewable energy (solar and wind in particular) is estimated to contribute approximately 62% of power generated globally by 2050 (currently comprising about 10%). Battery-powered vehicles will represent about 70% of all vehicles on the road by the year 2040 (currently 5%). This has a major impact on the battery industry. In 2021, the income-generating opportunity in this sector amounted to VS$37 billion, but it is projected to be US$354 billion by 2030.

3. Artificial intelligence:
In 2021, this industry generated VS$51,5 billion. It is expected to increase to US$500 billion by 2023. In 2016, the average IQ level of artificial intelligence was approximately 50 (the level of a 6-year-old child is 60). By 2022, it has already risen to 90. Studies predict a 50% chance of robots doing all jobs better than their human counterparts within 120 years.

4. Space industry:
The space industry is expected to generate US$1,2 trillion in income by 2040, compared to the current US$300 billion. The biggest change in this industry is the cost of launching spacecraft. From 1970 to 2010, the average launch cost was US$16 000 per kilogram. In 2010, with the launch of Space X’s Falcon, the cost was US$2 500/kg. The current cost is US$1 500 and by 2040, it will be US$100/kg. Space X’s own projection is approximately US$30/kg. Satellite internet services offer the biggest growth opportunity in the space industry.

5. Internet:
Only 60% of the global population have internet access. The biggest number of people with no internet access are in Africa and Asia. The only effective way of servicing these vast areas will be via satellite internet services. This market currently generates US$3,98 billion, projected to rise to US$17,43 billion by 2030. Our own Elon Musk appears to be the big leader in this field. His internet service Starlink already has about 3 000 satellites in a network approximately 550 km from the earth. His ultimate goal is to have 42 000 of these satellites in his network.

Many of the abovementioned technologies are still speculative in nature, and most of the companies in these sectors are not making a profit yet. However, investors would be well advised to watch these upcoming opportunities.