The first financial quarter of the year has proved to be volatile despite one of the fastest increasing interest rate cycles in history as inflation remains stubbornly above most Central Bank target ranges. This, coupled with fears of a recession as a result of rapid interest rate increases and geopolitical tensions, has continued to cast a shadow of uncertainty for global investors.
The South African situation, particularly politically, declined at an accelerated rate. The ANC’s disastrous oversight of the state of affairs at Eskom and their inability to provide power has hampered and constrained growth. Their ridiculous stance in terms of siding with Russia and China has not only resulted in South Africa being Grey Listed, but has caused significant pressure on the rand which has weakened to the lowest levels in history. The continued enforcement of BEE and affirmative action has resulted in South Africa having the highest unemployment in the world. Statistics show that 47% of South Africans now rely on monthly grants in some way, with 18 million permanent grant beneficiaries and around 10 million on the recently introduced social distress grant. In other words, there are 30 million people who are unlikely to contribute to the economy. Given the already high and rising tide of unemployment and a stagnant GDP growth, there are commentators who have serious concerns about the possibility of social unrest relating to food shortages. It is enough to make even the most seasoned investor emotional! Don’t be! For it is in times like these where it is your investment advisors task to focus on fundamentals and block out the emotional noise. Mistakes can be made in an emotional environment such as the current SA situation or in corrective phases of global markets.
Fortunately, there are currently still alternatives in terms of South African’s ability to either externalise funds and/or buy rand hedged stocks locally. The externalisation of funds can be done using an individual’s discretionary tax allowance, although given the weakened rand, it may be advisable to wait and see if there is any semblance of strength going forward. Despite these negatives, local portfolios have performed satisfactorily as a result of the large rand hedge component that makes up our model portfolios. Diversified investment portfolios with rand hedged shares can earn in dollars and pounds and enjoy reporting in rand’s. We have seen a significant divergence in the Johannesburg Stock Exchange (JSE) between South African inwardly focused companies and those that have had the ability to earn internationally. South African companies are now trading on some of the most attractive multiples in history but it remains to be seen whether the brave investor is prepared to explore these opportunities.
The geopolitical tension between BRICS (Brazil, Russia, India, China and South Africa) and the West has escalated and we continue to see supply chain disruptions and an elevation in sanctioning of certain technological companies, between the United States and China in particular. One would hope to see a thawing of these relationships as they are the globes biggest trading partners. The continued conflict between Russia and the Ukraine has seen further increase in supply of arms to the Ukraine from the West and, judging by the newsfeeds, it’s perceived that South Africa, China and Russia are growing closer together. If the South African Government, similar to the Indian Government, had remained neutral and adopted a more moderate stance, we would possibly not be facing the unintended consequences of some form of sanctions being imposed. One does need to bear in mind that South Africa has previously been through periods of elevated risk such as the one we are currently experiencing and recovered.
As a result of the rapid increase in interest rates globally, income focused investors have seen a significant increase in returns in the form of interest on deposit, which has been a welcome change from the lows at the beginning of Covid where interest rates were slashed. A concern is that as a result of these rapid increases, people with debt and in particular those with mortgage bonds, may become financially stressed. We have already seen some property markets and the value of properties coming off what has been a historically strong run for them, particularly in Europe, the United States and in the developed world.
The recent dramatic rise of AI (artificial intelligence) has seen attention from both governments and any investment company associated with AI investments has seen dramatic rises in their share prices. This is a fledgling industry and certainly has room for growth but comes with concerns around how to regulate this space. AI is a space that we will continue to watch.
Below is a breakdown of how the International Bourses have fared:
The below graph tracks the performance of the Rand against the US Dollar over a seven year period:
The below graphs track the performance of the JSE All Share Index over a seven year period:
Whilst we may see further volatility in all markets and currencies, it is a time of unique opportunity and over the medium term, one could well see a reduction in interest rates that bodes well for growth stocks and could turn out to be a stock picker’s paradise.
On a lighter note, we have now completed the rollout of our new online system and we encourage you to login as often as possible to view your investment portfolios and reports. I know, as with myself, it can be challenging to embrace new technologies but we do recommend you try and utilise this authenticated digital platform as a more secure way to view your personal investments and financial information. Should you require any assistance, please feel free to contact us.