View from the Chair - Proficio 2022 Issue 2

With half of 2022 in our rear-view Mike, in his View from the Chair, guides us on how to keep our eyes on the long term prize despite the bumpy ride.

Mike Estment CFP®

Mike Estment CFP®

Executive Chairman: JHB and Private Wealth Manager

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View from the Chair - Proficio 2022 Issue 2

Well, 2022 has certainly not disappointed in delivering a dramatic series of events: turbulence in geopolitics, markets and most importantly inflation and the probable consequences this has already and will continue to trigger.

As an emerging market and resource-rich economy, we have enjoyed the tailwinds as inventories around the world get restocked. These tailwinds have been interrupted this year by the remarkable and scary invasion of Ukraine by Russia. This event has disrupted many aspects of the global economy, but mustn't be seen in isolation. It has focused the world's attention on inflation, but this inflation, until recently described as "a temporary blip until supply chains are re-established", is way more serious an issue. Central banks generally don't like upsetting apple carts. Their stated intention is the careful management and stabilisation of economic activity, and in so doing, avoiding policy shocks to which economies react negatively (read interest rate increases). When the apple cart is a somewhat vulnerable world economy, struggling to return to "normal" after the two-plus years of Covid-19 craziness, they would also be under pressure from their respective political masters to go easy on the narrative and any actions (such as raising rates!).

So, from a slow and gradual upward tilt to temper the bothersome inflation, brought on by a disturbed supply and a shortage of computer chips, reality has set in. It has been further impacted by the Ukraine crisis, which interestingly has the rest of the world, probably for the first time, realising the strategic importance of the Russia/Ukraine economies and their significance regarding foodstuff and energy output in Western Europe and, indeed, the world.

Back to the numbers. The US Fed has just announced a further increase in rates. This, however, is the thin edge of the wedge. The market is now contemplating a further 300bps before 2023 is done.

These corrections have been delayed, and without saying "I told you so", in my editorial in two of the late-2021 Proficios I opined that the longer the banks remain passive, the steeper the inevitable shape of interest rate increases. This is now playing out and, as is often the case, adding to the nervousness and material selloffs of many high-flying tech favourites and other equities.

Living, as many of our readers do on the Southern tip of Africa, where home-bias leads to an exaggerated sense of relevance, these developments are significant. NFB has, for as long as I can remember, supported global investment options in conjunction with our local propositions. Offshore, where cash hasn't offered any reasonable return, has had us focusing portfolios on growth. Usually, this has come from markets and real estate for typical investors, whilst private equity and venture capital-type investments (often geared) have typified large family offices. It is time for caution. Free lunches aren't as easily available, and with the already obvious increase in borrowing and lending rates becoming available, alternatives to pure equity, property and fully at-risk portfolio investments are returning.

NFB has access to what are termed structured products. Available both on and offshore, these combine bonds and indices to achieve different outcomes. These products might focus on guaranteeing capital, or most of one's capital, combined with an equity-like return should the markets deliver positive returns. The point I am making is that there are alternatives, and we would be delighted to discuss these. Where these products are still considered a little racy, cash and bonds are returning to levels where they offer an alternative.

I've been at NFB for 37 proud years. Having saved here and abroad, I have always believed in spreading the load. My family has always been tilted towards long-term equity, but as I approach retirement, I've begun to "leave the tree but trim the fruit". This implies leaving the original equity or growth investment in place and trimming the growth. (Be careful of CGT. Whilst I don't like paying tax, this is probably the most palatable! Notably, tax rates over time tend to trend UPWARD, making the benefit of "paying CGT later" worth reconsidering).

This also crystallises the profit, allowing us to seek a guaranteed product which protects the gain whilst leaving the original portfolio in place, weathering the volatility - but probable great outcome - if left in the hands of the equity portfolio manager for the longer term.

The last two years have been dramatic in their impact on countries and economies, but especially on people and their families. Please reach out if we can be of assistance. NFB remains most grateful for your custom and loyalty.



This article features in the 2022 issue 2 edition of the Proficio, NFB's bi-monthly financial update newsletter. Download the complete newsletter here.





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