By Andró Griessel

Be mindful of irrational vigor in the market

Many of us, myself included, started 2020 with the bravado of a Datsun 1400 bakkie. However, by mid-March 2020 ended up on its roof like you would expect from such a bakkie. Move the clock to 31 December and the returns of 2020 look like that of any other uneventful year. This makes me rather nervous, but more about this later.

See the updated asset class returns below since 1995 (26 years). The red blocks indicate the weakest performing asset class and the green blocks show the best performing asset class for each particular year. All returns are shown in rand terms.

It shows:

• Offshore equities have been the best performing asset class for the past two consecutive years.
• SA listed property has by far been the worst asset class, with a decline of 34.5%.
• SA equities delivered 7% return.
• Offshore property also delivered negative returns in both dollar and rand terms.
• SA cash and the USD-dollar have given investors the exact same return in rand terms.

When looking at the longer-term numbers, the table shows the following:

• Local listed property, at one stage by far the best performing asset class over all periods, is now the worst asset class over five years as well as 10 years, due to the poor performance over the past three years.This should serve as a timely reminder that trees do not grow to the sky and that the phenomenon where asset classes return to their long-term average is indeed a reality.
• There is almost no difference between the 25-year average return of equities and property, for both local and offshore.However, for the past 10 years there has been a significant difference in returns.Part of the answer to the question as to why this is the case, can be found by looking at the starting point of the exchange rate 10 years ago (rand strength) as well as relative valuations between emerging markets and developed markets (developed markets were cheap).

  My old saying remains: What you pay for an asset plays a large role in the returns you will receive following the purchase.

• Dollar cash has by far been the worst asset class over 15 years, 20 years, and 25 years.

So… will 2021 just be business as usual for the markets?

I have no idea but, as I have mentioned in my opening paragraph, I am rather nervous about what lies ahead.

The reason is that things happened in 2020 that would break any rational person’s brain. Here are a few:

• Elon Musk’s company Tesla is currently valued at around $830 billion after the share price has increased by 800% since the beginning of 2020.At current valuations it means that on paper Tesla is worth more than all the other car manufacturers such as Toyota, Volkswagen, BMW, Mercedes-Benz, etc. combined.Tesla sold around 500 000 vehicles in 2020 out of the total vehicle sales of 62 million – which is less than 1%.

  While the share price of Tesla has shot up by 800%, the company’s earnings “only” grew by 26% in 2020. Tesla’s price per share is way ahead of its earnings per share, but faithful followers believe the company will grow into its valuation and on top of that, at the speed of white light.

• Readers are probably aware of the drama surrounding WhatsApp and user privacy. Elon Musk tweeted the words “Use Signal”. Signal is the name of a competitor of WhatsApp.Speculative investors immediately reacted to the tweet and tried to make money out of the fact that more people will be using Signal after seeing Musk’s tweet. These investors aggressively started buying the stock of a company called Signal Advance.The company’s share price increased by 527% in one day. Just a small problem… The tiny company has nothing to do with the Signal that Elon Musk was referring to in his Twitter message.
• A year ago, 1 Bitcoin cost around $7 000. The current price of 1 Bitcoin is around $35 000, which amounts to a 400% increase in one year.Bitcoin still has no practical usage, has no material form and is basically just an entry in a digital register, it pays no dividend and has no value except for perceptual value.It is estimated that all the computers that are busy mining Bitcoin is using the equivalent of total electricity usage of Switzerland.
• The world is drowning in debt.In 2020 alone, due to the pandemic and the reaction of governments, the ratios of international debt-to-GDP has increased from 83% to 100%, with the largest economy – the USA – who’s debt-to-GDP ratio is 130% is the largest since the Second World War.
• Almost every second unemployed person, student, or housewife (especially in the USA) is trading complex financial instruments. Even worse, a lot of them seems to be successful.

To summarize what worries me:

There are currently certain segments of the financial world where fundamental truths have disappeared and where an aura of self-confidence is filling the air. Let us be honest, the eternal pessimist achieves nothing, and my worries are not from a place of pessimism. The only thing I know is that the man in a casino can be very lucky, but if he stays there for long enough, he might walk out with his pants around his ankles and his tail between his legs.

Andró Griessel is a certified financial planner and director of ProVérte Wealth and Risk Management. Contact him at info@temp.sg-build.co.za.

Although all possible care was taken in the drafting of this document, the factual correctness of the information contained herein cannot be guaranteed. This document does not constitute advice and anyone planning on taking any financial action based on this document, is strongly advised to first consult with their personal financial advisor. ProVérte Wealth & Risk Management is an authorised financial service provider with FSP no. 5966.