View from the Chair - Proficio Nov / Dec 2021

Don't ignore the present, but maintain your long-term focus.

Mike Estment CFP®

Mike Estment CFP®

Executive Chairman And Private Wealth Manager

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View from the Chair - Proficio Nov / Dec 2021

There is a lot going on in our lives right now - politically, socially, economically, and personally. I thought I would reflect a little on several of these, focusing on markets and investments and reminding us of the importance of balance, enjoyment, and the long game. While they are somewhat dull, getting investments right makes life a lot easier and safer.

Advisory firms, like NFB, earn income by providing advice and service to thousands of (predominantly) South Africans. We are all living through a once-in-a-lifetime experience: Vax versus anti-vax, work from home, calls for compulsory returns to offices, fundamental changes in real estate and office rental markets, the dramatic revolution in online 'everything' - all of which are impacting on people's perceptions and their approach to life in general.

The realisation of mortality, and our vulnerability to a disease that seems to continuously morph into a new strain, are everyday discussion points. Loneliness, cabin fever, and sometimes a sense of hopelessness are ever-present and probably need us all to be watchful, both for ourselves and others about whom we care. I've seen some rather hilarious memes of dads being escorted back to the office by their young kids, with the kid suggesting that the dad not worry, and it'll be OK! Families, communities, and circles of friends have become more important, which is a great positive out of what has otherwise been an annus horribilis.

Onto markets and investments. Some say we are just at the beginning of an upward correction as the world comes back from Covid. I would argue that the developed world has extended (having recovered from Covid) one of the longest and strongest bull markets in recent history. SA largely missed this and remains reasonably attractive in terms of SA Inc stocks, some of which are still offering good value. However, we are part of the global village and remain sensitive to developments and trends.

Inflation is a hot topic. While it serves the political agenda to have the Fed, BoE, and other monetary authorities suggest that this inflationary experience is a passing phase, it seems that housing, commodities in general, labour in developed countries, and other important determinants of sustained inflation are way above trend, and in some cases radically higher. This can be disregarded but will eventually lead to a steeper correction in rates when the authorities relent and act. As investors, this means that this one-way bet on continuous growth in stocks and other assets is fast approaching a point where more scrutiny of the downside is needed. The impact of rates increasing is twofold - it gives investors an alternative to holding riskier shares and earning dividends and also makes borrowing more expensive.

Another issue for all of us South Africans is the debate about the rand. Recent years have endowed SA with some wonderful demand for our resources and other goods, even more so during this Covid period. When the world is growing or repairing itself, as has been the case, resource-based economies thrive. In SA, this has not only materially improved our balance of payments, but it has also provided SARS and Treasury with massive, unexpected tax revenue. This also overflows into other areas of the broader economy, both directly linked to mining and resources, but even broader. Like all good things, these tailwinds don't last forever. Looking at high-grade iron ore as an example, the remarkable price increase was followed by the price halving in a very short period. This price change, together with those of other goods, might leave SA's rand high and dry should this demand weakness persist. Let's hope I'm over pessimistic and the global demand for "stuff" resumes and continues!

"… we need significant long-term capital investment rather than "hot flows" into our share and bond markets."

Politics and economics remain very fluid in SA. The indecision and lack of action following the Zondo process, the recent unrest, and the continued exposure of crooks we all know exist leads to anxiety. This makes us all very nervous. We worry about when to take allowances offshore, get very excited when the rand goes to 13 something, but quietly panic when it is back at 15, and we delayed buying dollars in the hope that it was on its way below 13 (ring any bells?). Interestingly, overseas investors see things differently. They continue to trade the currency. However, we need significant long-term capital investment rather than "hot flows" into our share and bond markets.

In summary, I am beginning to consider deferring new, riskier investments in the belief that we are closing in on a time where the market will display better value. This does not suggest investors bailing out of portfolios, but rather careful consideration of the markets, changing circumstances, and choices available.

NFB offers structured products from time to time. These allow one the advantage of exposure to equity returns while providing downside protection should markets soften. I often use a phrase that refers to the tree and the fruit. This suggests taking some of the profit (fruit) off the table while leaving the original portfolio deployed (tree). Investments and portfolios are most often unique to individuals.

We would be delighted to discuss this content, your portfolio, and the market at large with you. Please reach out if we can help. As always, we thank you for your support and for the many referrals we receive from you.



This article features in the Nov / Dec 2021 edition of the Proficio, NFB's bi-monthly financial update newsletter. Download the complete newsletter here.




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