A YEAR IN REVIEW 2022

"In the midst of every crisis, lies great opportunity.” ― Albert Einstein

Most equity and bond markets were down for the majority of the year, with headwinds throughout the year being widespread across developed and emerging economies. Geopolitical tension, inflation at unsustainably high levels, increasing interest rates and concerns of a global recession looming, dominated headlines and markets.

What at first appeared as a nowhere to hide scenario as both equity and bond markets sold off for most of the year, a strong rally in the final quarter illustrated that markets do recover and reward patient investors - a precursor for a long-term investment view.

All local asset classes rallied in the final quarter, SA property rebounding from its lows, while bonds managed a modest gain. The JSE ALSI gained significantly in the third quarter. The JSE All Share Index finished close to the price it started at the beginning of 2022 and in a pleasant surprise, South African GDP grew by 1.6% in the third quarter.

Recession fears helped make 2022 the worst year for US Stocks since 2008. In fact, the S&P 500’s 19.4 % drop in 2022 was it’s fourth-largest drop since 1945, according to CFRA Research.

In the last quarter, global equity markets performed well from a weak base. The last quarter’s positive price action was not due to any improving fundamentals, but rather due to perceived relief that current conditions are not as bad as feared. In contrast to the prevailing negative mood, US real GDP rose by 3.8% in Q4, up from 3.2% in Q3 and -1.1% in the first half of 2022 – an indication that US economic momentum may be improving.

MARKET RETURNS FOR 2022

WHAT HAPPENED IN 2022

To understand the current state of the market and how we got here, we need to understand the catalyst and series of events that led us to the current state. Sometimes we need to look back to understand how to move forward. What we are experiencing now is an aftermath of events of the past.

2020-2021 WERE YEARS SYNONYMOUS WITH THE COVID-19 PANDEMIC

It was not only a public health crisis, but a pandemic that was felt across the global economy. As infectious diseases spread more rapidly in open economies, governments stepped in by implementing lockdown measures to curb the spread while long-term solutions such as vaccinations were in development.

The impact of this however, caused a halt in productivity, leading to business closures and rising unemployment. Furthermore, a slowdown in the transportation and manufacturing industries led to supply chain disruptions around the globe. To cushion these effects, global central banks adopted a “dovish stance” on monetary policy, slashing interest rates to encourage spending and stimulate economic growth – a decision which would later contribute to inflationary pressures. With that came inflated asset prices and irrational exuberance in equity markets.

Against this backdrop, fiscal stimulus in the form of encouraged spending, stimulus checks and very “easy” monetary policies followed to cushion the hardship and loss of jobs. This started to stimulate demand (specifically for goods), while, from a supply perspective, things began to grind to a halt. Higher prices in the form of inflation were always going to occur, but it was underestimated how significant that would be. Add to that, geopolitical tensions and under-investment in energy, and we are where we are today.

2022 “INFLATION ECONOMICS 101” – TOO MUCH MONEY CHASING TOO FEW GOODS

Fast-forward to 2022, a post-pandemic world, where communities are largely vaccinated, economies have opened, tourism is on the rise and a hybrid, work-from-home-and-office is now the norm. These highlights have been eclipsed by the inflationary pressures and the Russia-Ukraine war.

Economics 101 teaches us that lowering interest rates and inflation makes it more attractive for businesses and consumers to spend on goods and services. Conversely, increasing interest rates and inflation should encourage the opposite behaviour. Please click here to read GIB’s Article on Inflation and what to do and what not to do in a high inflationary environment.

CONFLICT NEVER RESOLVES ANYTHING - ESPECIALLY INFLATION

The Russia-Ukraine war has further exacerbated the inflation situation given its impact on energy and commodity prices, with Russia and Ukraine being major energy and soft commodity producers. Please click here to read our Article on Russia-Ukraine conflict.

Europe is highly vulnerable to the war through its reliance on Russian energy imports. The region has been experiencing a problem with its energy supply which began last year when power grid issues in Texas reduced cargoes of liquefied gas to Europe. Furthermore, a colder-than-average winter, and the region increasing its energy consumption by 25%, led to a surge in energy prices.

THE CURRENT PERFECT INFLATION STORM

This perfect storm has resulted in global inflation rates coming in at multi-decade highs. At the end of the third quarter normalising somewhat, US inflation, as measured by headline CPI, was at 8.3%. In Europe, headline CPI reached a new record high of 9.1%. In the UK, headline CPI came in at 9.9%. Locally, South Africa’s inflation print came in at an uncomfortable level of 7.8%, above the upper limit of the South African Reserve Bank’s (SARB) target band of 3% – 6%. Global central banks have been faced with the challenging dilemma of taming inflation through implementing rate hikes or supporting growth. Clearly, the priority is to tame the unsustainably high inflation levels – most central banks have a mandate to protect the value of currencies.

THE SOUTH AFRICAN “ESKOM” ECONOMY ALSO UNDER INFLATION PRESSURE

Notwithstanding South Africa’s own challenges of Eskom and loadshedding, the high unemployment rate, low economic growth, and a mounting debt burden, the JSE was relatively more resilient than its global peers.

In the month of November, local equity indices were up strongly; the Top 40 (+14.3%), All Share (+12.3%), and Capped SWIX (+9.6%). This rally allowed the JSE All Share Index to finish close to the price it started at the beginning of 2022.

“After contracting by 0.7% in the second quarter of 2022, the economy rallied in the third quarter, expanding by 1.6%. The agriculture, finance, transport, and manufacturing industries were the main drivers of growth on the supply side of the economy. The demand side of the economy was lifted by a rise in exports and government consumption.” - Stats SA

SOUTH AFRICAN POLITICAL RISK IS STILL INFLUENCING THE LOCAL MARKET

The 3rd quarter rally came to an abrupt end with the “Phala Phala” affair, SA assets dropped on media reports on the potential resignation by President Cyril Ramaphosa on the back of a Parliamentary inquiry that found the president had a case to answer to a breach of the country’s anti-corruption laws.

The rand weakened sharply on press speculation that President Ramaphosa would resign, causing the rand to trade at R17.90 to the US dollar on the reports, before settling at around R17.60, at 2% weaker on the day, after a press conference by the president was cancelled. The impact on local markets has been similar to the pattern we usually see when an SA-specific situation emerges; bonds weakened (the all-bond index was down -4%), while the SA Inc sectors of the JSE fell sharply, led by banks (-8%) and general retailers (-3%).

Despite the usual Eskom and Political Risk in South Africa, local equities have performed well when compared to offshore exchanges. Naturally, from a long-term investor perspective, we promote diversification across local and offshore, and expect opportunities to present themselves locally and abroad.

DESTINY PORTFOLIO DEVELOPMENTS

The increased allowance for offshore assets within a retirement fund that was announced by treasury offers an opportunity for more diversification through exposure to a wider range of global companies and industries.

To this end, GIB has introduced a market first, the Destiny Global Enhanced Portfolio. GIB will ensure that the Portfolio will invest the maximum of 45% with offshore asset managers in hard currency and use a selection process within the remaining local equity component to invest in South African companies that generate most of their revenue outside of SA in hard currency.

This unique construction process utilises several specialist, active and passive, single manager mandates to create an aggressive global facing portfolio whilst still taking advantage of local retirement tax concessions.

Please click here to read more about The Destiny Global Enhanced Portfolio.

INVESTING IS A LONG-TERM EXERCISE

The year was extremely difficult for markets, and investors have been increasingly concerned about the volatility of their portfolios. When uncertainty prevails, it’s easy to let emotions run high, which sometimes leads to irrational decisions and reactions, such as panic-selling or sitting on cash and not deploying the funds into growth assets. This could be detrimental in the long run.

While these major world events have far-reaching short-term consequences on investment performance, when one adopts a long-term investment view, these events tend to be less harsh. While the growth outlook remains challenging, asset prices have already sold off significantly and valuations for both stocks and bonds now look more attractive. This gives investors relatively attractive entry points and may even be offering once-in-a-lifetime investment opportunities. Finally, we come to the end of another volatile year that tested the best of us.

Individuals should not allow short-term volatility to change their long-term asset allocation decisions and one should not be too hasty in making decisions. Look for objective truths, and always speak to a GIB financial advisor so that they can help you to develop a holistic, multi-generational financial planning and constructive retirement plan.