By Andró Griessel
7 December 2024
In case you haven’t heard, last month a banana (the simple yellow kind that monkeys love) was taped to a whiteboard and sold for $5.2 million (not $6.2 million as some online sources claim) at a Sotheby’s auction. At the current exchange rate, that’s around R95 million.
The banana was purchased by Justin Sun, a 34-year-old Chinese native who made his fortune in cryptocurrency. To add to the absurdity, he removed the banana from the board during the event, ate it, and simply walked off stage. Call me old-fashioned, but such foolishness not only bothers me but also serves as a stark warning, much like the proverbial canary in the coal mine, hinting at an impending global financial crisis.
Adding to the spectacle, there are approximately 10,300 cryptocurrencies today, collectively ‘valued’ at $3.56 trillion (equivalent to the GDP of the United Kingdom). In my view, these assets lack fundamental value, which explains why holders of such assets often indulge in such antics. Meanwhile, crypto-backed lending (CBL) has also gained traction earlier this year.
The aftermath of the global financial crisis, characterized by accommodative monetary policies and excessive money printing (especially in the US), has fuelled speculative flames that burn brightly. However, like any fire, it needs fuel to sustain itself; otherwise, it may quickly fizzle out.
This article, however, is not about Bitcoin or cryptocurrencies but rather about the era of nearly free money that has shaped the world we live in today, and what this means for you and me as everyday investors. How does this affect you as an ordinary investor in stocks or unit trusts, with no ties to Bitcoin or other cryptocurrencies? Like the boy who cried wolf, I’ve long cautioned against reckless foreign allocations in investment portfolios.
I am briefly going to summarise my concerns:
- Currently, the MSCI Index automatically gives investors 73% exposure to the US market, with only 6% in Japan, 4% in the UK, and the remaining 17% spread across the rest of the world. This level of concentration is unprecedented. By comparison, during Japan’s economic golden age in 1989, its market made up just 45% of the MSCI Index, with the US at only 30%.
- Most South African investors are accustomed to high geographic concentration in portfolios since, up until a few years ago, most investors had over 73% exposure to the market. This concentration isn’t a massive problem when valuations are attractive — but currently, that’s not the case. Valuations, whether price-to-book, price-to-earnings, or cyclically adjusted P/E ratios, suggest the US market is extremely expensive. On a price-to-book basis, the US market is trading at over five times. This has happened only twice in the past 24 years (2000 and 2021), and in both cases, the market experienced sharp declines shortly thereafter. It’s worth remembering that Japan’s Topix Index still trades about 5% below its 1989 peak, and the period from 2000-2010 was also a lost decade for US investors.
- Finally, consider the astronomical debt levels in the US. It took over 100 years for the US government to accumulate $1 trillion in debt by 1981. By 2008, after the global financial crisis, this had ballooned to $10 trillion. By 2020, during the COVID-19 pandemic, it reached $24 trillion, and in just four years, it has surged to $36 trillion.
If I had to summarise this article, the key takeaways would be:
- Currently, index investments in the MSCI are heavily concentrated in an expensive market. They are structurally overweight in expensive assets and underweight in cheaper ones. This is likely to result in weaker returns than you may have become accustomed to.
- Given the information that you have at your disposal, if your total portfolio consisted only of cash, and you can without any restrictions allocate the cash to different asset classes, would you allocate it the same way it is currently allocated?
- The best investors are not those who maximised their gains during a bull run but those who minimised their losses at the end of it.
Andró Griessel is a certified financial planner at Woodland Wealth. Contact him at info@woodlandwealth.co.za
Although all possible care has been taken in the preparation of this document, the factual correctness of the information contained herein cannot be guaranteed. This document does not constitute advice and anyone who intends to take any financial action based on this document is strongly advised to first consult with his/her personal financial advisor. Woodland Wealth is an authorized financial service provider with FSP no. 5966.