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Taking Stock And Reflecting On The Year That Was

As a runner, the change in seasons gives me time to reflect. Summer was short and feels like a distant memory. Autumn (my personal favourite) always reminds me that change is the only constant. Winter (which has felt never-ending this year) reminds me of all that’s lost, the hardship of life for so many and the brevity of daylight hours. As we move to spring and back to summer, I am reminded of the new life, new colours, and new daylight hours that come with this season and reminded of how the cycle continues.

If we reflect on the past year of investing, it too has experienced its seasons and its cycles.

At face value, it appears as though markets have performed well, however, broadly speaking there have been some bad landmines that simply could not have been avoided by all investors. 2021 was also by no means a dull year – global bonds bottomed out, the Evergrande debacle, Chinese tech stocks slumped and the contagion of it all to emerging markets.

–                  S.A. Equities are making a comeback

After a seven-year drought of returns for domestic equities, the past 18 months have seen a strong rebound in S.A. equities with broad-based returns across the sectors. While 2020 saw resource shares (mainly platinum and diversified miners) performing well, 2021 has seen a rotation into more unloved areas of the market. If we look back at 2021, the strongest performing areas have been what we would term “S.A. Inc.” shares, namely banks, retailers and select industrial shares.

What has caught many investors by surprise this year, has been the sharp fall in the Naspers and Prosus share price. Market darling Naspers, combined with Prosus (its European listed counterpart) account for almost 20% of the All-Share Index. A combination of concerns regarding the Chinese government’s interference in their market with regards to the new regulation for select tech companies alongside the disappointment surrounding the Naspers Prosus share swap and/or company restructure has proved to be strong headwinds for these shares.

–                  Fixed Income, has not been so ‘fixed’ anymore

Fixed income managers have not had an easy year, with 2021 not being the year for income assets. What had appeared to be a stable (and dare I say “boring” asset class) was no more, as 2021 saw fixed income assets experience a lot of volatility.

–                  S.A. Government bonds bamboozled

S.A. Government bonds remain perplexing. We are seeing good value in this asset class, with S.A. government bonds offering a yield of around 9.5%. This is almost 5% ahead of cash and 4% ahead of inflation, which is unheard of in global markets. Yet despite this attractive yield, foreigners have not been investing in our bond market to the levels they have previously. As a result, this asset class is generating a decent yield for investors but has been subject to market volatility this year due to the lack of foreign support. 

–                  Cash is still out in the cold

We see little room for holding cash in portfolios. Not only is the nominal yield low (around 4%), it is in fact offering a negative real yield, given that inflation is close to 5%.

If we turn to global markets, it seems nothing can stop this bull.

While value shares and unloved sectors (such as energy and UK equities) have certainly rallied and have been solid contributors to portfolio performance, the tech stocks in the US have reached stratospheric levels (both in terms of performance and in price).

In our opinion, this sector is starting to carry a striking resemblance to the tech bubble of the late 90s. Firstly, the market is trading at extreme valuations and is experiencing new IPO’s (stock listings) in the magnitude last seen in the late 1990s. (If it walks like a duck and talks like a duck…) We would prefer to be cautious at this point. We remain materially underweight US large-cap tech shares.

Despite emerging markets selling off sharply on the back of the Chinese government’s interference in capital markets and the restrictions and regulations placed on their tech companies, we are seeing good pockets of opportunity in emerging markets.

S.A. fixed income managers had a tough time in 2021; however, it was even worse for global fixed income managers. Global bonds have been one of the worst performers in 2021. With starting yields at low levels and bond yields rising throughout the year, this has led to bondholders experiencing meaningful capital losses.

Looking forward – onwards and upwards to 2022

In the wise words of Warren Buffett – “Be fearful when others are greedy and greedy when others are fearful”. There is much exuberance, easy money and excitement in certain areas of the market. This level of optimism and crowding makes us “fearful”. 

There will be good news stories for companies and sectors that will be extrapolated into the future with investors prepared to pay extreme prices just to own these golden companies. Remember that “Price is what you pay, but value is what you get” – another valuable lesson shared by Mr. Buffett. Now is the time to be vigilant and to ensure that you are getting value for what you buy.

You may hear some commentators saying that “markets are expensive and now is not the time to be invested” whereas others say that “things will just keep going up”. To this we would say there is never a “right time” to invest, the key is just to be invested and to remain invested.

By Victoria Reuvers,  Managing Director, Morningstar Investment Management South Africa