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The world is on its head, but the principles of investing remain constant

Given the current market backdrop, there is a lot of uncertainty that investors face both in local and global markets as we navigate 2022.

The most powerful protection against market volatility and uncertainty is diversification within portfolios, says Debra Slabber.

In the US, 2021 ranked as the ninth-lowest peak-to-trough drawdown in a calendar year out of the past 94 years of data. That’s quite a feat, seeing as 2021 was by no means a dull year – global bonds bottomed out, we saw the Evergrande debacle unfold, Chinese tech stocks slumped and then the contagion of it all to emerging markets.

Fast forward four months into 2022 and we are back to a period where market volatility and uncertainty are the order of the day and to say that 2022 has been volatile would probably be somewhat of an understatement.

Investors are navigating their way through a time when it feels like everything is going up (and not necessarily in a good way) – inflation, interest rates, the oil price and geopolitical tension to name just a few. Understandably, clients are asking “where to from here?”.

If we look at the various asset class returns over the first quarter (year-to-date) of 2022 there are a few stand-out points.

Local is lekker – for a change

Over the first three months of the year, we saw global equities fall by 13% in rands (5% in USD) versus South African equities that are up 4% in rands. That is a 17%-rand differential in performance in just three months. There has been a lot of positive news coming out of South Africa recently.

South African manufacturing sentiment rose to the highest level in almost 23 years, the national state of disaster ended after 750 days, Moody’s revised South Africa’s outlook to “stable” from “negative” (stating that our fiscal position has “markedly recovered”) and the South African Reserve Bank (SARB) broke a revenue record and collected more than R1.5 trillion net tax revenue (a 25.1% increase from the previous year).

Energy supply disruptions in Russia and Ukraine (due to the current conflict), combined with sanctions and boycotts against Russia have caused the price of energy and commodities (namely oil and gas) to soar.

The rise in commodity prices has impacted our local commodity counters and the SA resources sector has been a beneficiary of these higher prices (up close to 19% on a year-to-date basis). Favourable terms of trade have also been the main reason why the rand has been so strong when compared to other emerging market currencies (see graph below), and a large part of the volatility of our currency is a result of commodity price volatility.

While some of the easy money in local equities may well have been made by now, we are still seeing good value in select shares and areas of the market like resources and financials.

In global markets, the tide has turned
The MSCI World Index is down about -14% year-to-date (as at 31 March 2022, in rand terms). Value shares and unloved sectors of the market (such as energy and UK equities) certainly rallied and have been solid contributors to portfolio performance (as can be seen in the graph below). On the other hand, we have also witnessed previously high-flying areas of the market – such as growth stocks and technology companies – come under pressure.

The importance of building robust portfolios
Given the current market backdrop, there is a lot of uncertainty that investors face both in local and global markets as we navigate 2022. The most powerful protection against market volatility and uncertainty is diversification within portfolios.
Staying invested

Markets are and will always be complex. There is a constant oscillation between euphoria and depression and/or celebrating positives and obsessing over negatives. Markets are inherently unpredictable over the short term and driven by factors no machine or person can predict accurately.

Take the long view on your investments and ensure your portfolio is diversified to withstand bursts of volatility that may be experienced in the short term and accept that you will find very little advantage in trying to predict the future from one day to the next. Patience, perseverance, good savings habits, and a good sense of value will help you reach your financial goals.

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