By Andró Griessel

22/01/2022

At the beginning of each year, all sorts of financial “gurus” try to look into the proverbial crystal ball and then dare to make a prediction or three. I’ve made peace with the fact that I am not skilled with predictions and especially not with the exact timing behind them. So, let’s see if the past is aligned with prevailing views, because if not, there is a possibility that the present view, and therefore possibly our view of the future, is also not entirely accurate. Let’s have a look at what the past 27 years’ data tells us.

What does the last 27 years’ data tell us?

There are a lot of figures, so I’m highlighting a few pertinent points:

2021:

• For an investor in a typical pension fund or retirement annuity, 2021 was probably the best year in terms of returns since 2012.
• South African listed property was the best performing asset class (with 36.9%) out of the main asset classes represented here. However, it comes from a low base after the asset class basically collapsed between 2018 and 2020.
• Foreign bonds were the worst performer with a 1.1% return (in Rand terms).
• Foreign equities once again had a very good year, comfortably making it the best performing asset class over the past ten years.
• Emerging markets (our peers) were able to yield only 5.9% for the year while South African equities returned 29.2%. See the reverse of this in 2020.

Historically:

• Large movements in any direction can suddenly make the long-term figures look very different. For example, at the end of 2017, South African listed property was comfortably the best-performing asset class over ten years, 15 years, and 20 years. Today, it is the worst asset class over five years and the second-worst over ten years.
• Currently, foreign equities (MSCI World Index) is the best historical performer over five years, ten years, 15 years, and 27 years. Many investors are now in a hurry to invest money into this asset class. However, if you had invested in foreign equities exactly 20 years ago, despite an astronomical bull market over the past ten years, you would still only be able to achieve a return equivalent to South African government bonds, namely 9.5% per annum.
• When we look at the figures, the stepchild of investments (South African equities) suddenly does not look so bad over the past five years. The return of 11.4% over the past five years represents a real return of 7.1%, fully in line with long-term expectations.
• Another narrative that is simply not substantiated by figures is the “you are getting poorer because the rand is constantly weakening against the dollar”. An investment in a South African money market account would beat an investment in a US money market account over all periods (in rand or dollars, except over the past ten years). Over the past five years, the rand has yielded 2% more per year against that of the dollar in cash. Again, if you took out your money in 2001 (20 years ago), you were investing in a very expensive market with a very weak rand at that time, with the result that the rand has yielded only 2.6% per annum against the dollar. Remember that the rand should only remain constant against the dollar if our interest rates and inflation are the same. Currently, our inflation is almost the same, but interest rates differ significantly. Your real return in South Africa is therefore much greater than cash.

There are some points to highlight about 2021 and our current situation, which is not pointed out by the figures, and which may also cause the next five to ten years to look different from the last five to ten years. This may therefore necessitate revisiting asset allocation.

• The US economy looks like a well-oiled machine, but there is a red ‘check engine’ light in the form of a giant leap in the state’s debt levels. It took the US Federal Reserve 17 years, until the end of 2019, to pump a fraction of more than $4 trillion in liquidity into the economy. Just over the past two years alone, it has exploded to a total of more than $9 trillion.
• The US inflation rate is the highest it has been in 40 years. The proverbial corner in which they have thus gotten themselves into is one where interest rates cannot be lowered to stimulate the economy, but must move in the opposite direction, while the liquidity taps of the state must be turned off.
• The fantastic 2021 performance of the mega-companies, such as Apple, Microsoft, Alphabet (Google) and Meta (Facebook), disguises huge declines in some of the smaller high-growth stocks.
• It does not seem that anyone cares about fundamental analysis or discounted cash flow anymore, but in the occasion that the models are reconsidered, the valuations of companies look different when using a higher discount rate. Let there be no doubt that the ten-year declining interest rate cycle has come to an end.
• Inflation is popping up everywhere and the disruption of supply chains may accelerate the pace of inflation in many regions.

Expect an interesting ride in 2022! Diversification is your friend and be careful to extrapolate the past into the future. May you make well-informed decisions in the year ahead.

Andró Griessel is a certified financial planner and managing director at Woodland Wealth (previously known as ProVérte Wealth & Risk Management). Contact him at info@woodlandwealth.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. Woodland Wealth is an authorised financial service provider with FSP no. 5966.