The more prices fall, the more afraid we are and the less we want to own shares and other investments in financial markets. But this can mean missing an opportunity when the market turns, writes Laura du Preez.
Falling markets, screaming headlines, and plummeting investment values. It’s another market crisis set to unsettle uninformed investors.
Investment managers speaking at the recent Investment Forum say navigating the markets ahead will be tricky, but there are opportunities they believe will reward investors who, despite their fears, stay invested over the long term.
The Investment Forum, organized by the Collaborative Exchange, is held annually in Cape Town and Johannesburg.
Uncertain times = volatility
The global economy has changed dramatically over the past four months with the Russian invasion of Ukraine, the high oil price, the US economy overheating and China’s zero-Covid-19 strategy slowing that country’s economic growth, Kevin Lings, chief economist at Stanlib told the Investment Forum.
Lings said the US, facing inflation of 8%, needs to use interest rates to slow down its economy, employment, and housing market. But it is difficult to manage because the effects of an interest rate hike lag the increase.
If the Federal Reserve gets it wrong, the US economy will go into a recession, Lings says.
And financial markets – which typically price in future events – are not priced for a recession in the US, Lings says. The US makes up 60% of global stock markets.
The uncertainty about how events in the US and elsewhere may unfold has heightened volatility, Lings says. Don’t expect markets to stabilize soon as investors, including asset managers, try to work out how the rate tightening will unfold.
Agreeing with Lings that the current investment environment is very uncertain, Allan Gray portfolio manager Sean Munsie told the conference markets do not handle uncertainty well and this is why they have performed poorly over the year to date.
A crisis with the opportunity
Coronation chief investment officer, Karl Leinberger, described the current situation as a “real crisis”, but urged investors to consider four other crises over the past 25 years.
In 1998, there has been the emerging markets crisis, in the early 2000s the collapse of the tech stocks compounded by 9/11, in 2008 the great financial crisis and in 2020 the Covid pandemic crisis, Leinberger said.
In all these crises there were dramatic painful declines in markets that left us “afraid and grumpy”, he says.
The more prices fall, the more afraid we are and the less we want to own shares and other investments in financial markets, he says.
Our brains are hardwired for survival now and not for thinking long-term. As a result, few people stay invested in the market or take the opportunity to buy more when assets are priced cheaply. But by doing so, they miss the opportunity when the market turns, Leinberger says.
It is incredibly hard to time markets – to disinvest when times are bad and reinvest when times are good. This is because markets always look ahead, always turn when we least expect it and are always ahead of the news, he says.
Every crisis also feels different – and there are always reasons to think that more bad news is coming, he adds.
When the great financial crisis happened in 2008 every newspaper told you it was the end of the world and that we were set for a decade of recession like that which began in 1929. Instead markets recovered within two years, Leinberger says.
In 2020 share prices fell on news about the pandemic, especially as scientists were saying the vaccines were years away. The outlook appeared dire, but the markets turned just a few months later, he says.
As you wait for the next market turn, you should invest with an active manager who can identify where there is a dislocation between market prices and what investments are really worth, Leinberger says.
In these times, the market pricing is not efficient and you need investments and asset allocation to be actively managed, he says.
The easy money has been made
Echoing Leinberger’s sentiments, Munsie said over the past six or seven years passively managed or index-tracking investments have been a good strategy. Investors tracking indices weighted by their size invest in the winners of the past and these shares continued to do well until recently, he says.
The six big global tech stocks did most of the heavy lifting in global stock markets leading to a high concentration of these shares in US markets – concentration levels not seen since the dotcom bubble in the early 2000s, he says.
But recently things have become “more interesting” and the prices of the big tech stocks have fallen.
Being cheaper has not made them all good investments, however. These companies, as well as other large companies, are facing wage increases well above the high inflation rate and this could put significant pressure on their margins, Munsie says.
Asset managers can research which businesses will do well under the current conditions and their opinions may differ, but managers at the conference broadly agreed not all businesses will succeed in the years ahead.
Clyde Rossouw, manager of Ninety One’s Global Franchise Fund, warned investors against missing the nuances in an unbelievably complex world.
He believes a transfer of investment capital from tech stocks to energy stocks is over and cautioned against taking simple views like the one that energy stocks will do well when China recovers. The situation was more complex than that, he says.
Likewise, he says quality shares will do well but you should not expect a repeat of times when all growth stocks do well.
The market will not go back to chasing growth stocks because the cost of capital has changed, he says.
You have to look for better opportunities and that set of opportunities is wide and growing, Rossouw says.
Since the world is likely to stay complicated, it will be more important than ever to use managers who can pick the shares of companies with resilient earnings and strong free cash flows, he says.
Bullish on local
Good fund managers can also identify which markets around the world are likely to deliver stronger returns and especially for South African investors, whether to invest more globally or locally.
Munsie told the conference that local share prices relative to global ones are at levels they were in the early 2000s, indicating that in the next decade local shares may deliver better returns than global markets.
We are finding some great shares locally, Munsie says.
Leinberger says Coronation also favors local stocks and has never been more bullish with close to the maximum 75% allocation to SA equities in its multi-asset high equity fund.
The past decade was peaceful and prosperous but we do not know if the decades to come will be the same, especially as increasingly “brittle societies and economies” face rising political tension, rising interest rates, social upheaval from climate change, social inequality, and rising economic populism, Leinberger says.
But investors can profit from real-world crises by taking the long view and taking advantage of mispriced assets, he says.
That long-term view, should, however, be underpinned by deep research and the price you pay to invest should always come before timing, he concludes.
This article was first published on SmartAboutMoney.co.za, an initiative by the Association for Savings and Investment South Africa (ASISA).
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