May 17, 2021
Making decisions about money – whether in business or investing – is generally accepted as something that is taught as a maths-based field, in which you draw conclusions from spreadsheets, formulas and data. Yet, as Morgan Housel explains in his book, “The Psychology of Money”, that is not how money decisions are made in real life. He goes on to say, “Investing is not the study of finance. It’s the study of how people behave with money.”
In my view, his book is an essential read for all advisors, and one you should recommend to your clients too. Housel emphasises what we have been espousing in these letters for a long time: that we need to invest for the long term, and that we need to take risk to earn a return on that investment. What he explains particularly well is the role of volatility. As Housel puts it, volatility is a fee, not a fine. When you “pay” the fee, you accept the volatility and uncertainty, but ultimately earn a higher reward over the long term. Or, you can find an asset with less uncertainty, but with it comes the lower payoff.
This is particularly pertinent in the current environment. With perfect hindsight it is quite clear that – in an environment of relatively high interest rates – fixed income was the easy trade over the last five to seven years. However, with cash rates at multi-decade lows, investors need to take risk and ride out volatility. This book can help them understand the role of risk in their portfolios.
There is no shortage of uncertainty in the market, judging by the varying 12-month return periods. Over the calendar year to the end of December 2020, the JSE All Share Index returned 7%; skip three months ahead to the end of March 2021, and the 12-month return soared to 54%! Given this massive divergence in the 12-month returns, we should guide investors to look beyond the short term when making investment decisions and take at least a three-year view. If you really do want to look at more recent performance, don’t draw conclusions from market performance after January last year, as the returns are so disparate.
By the 23rd of March 2020, the SA equity market had lost more than 30% of its value from the start of the crash; however, it has since recovered completely and surpassed its previous highs. To an extent, it has made the COVID-19 crisis look like a minor interference, rather than what it was – a severe market shock. Normally, when crashes of this magnitude occur, markets take two to three years to recover. This time round, it only took seven months.
So, what does the quicker recovery tell us about what we can expect for the rest of the market cycle? A recent analysis by Morgan Stanley, titled “This cycle could run hotter but shorter”,1 suggests that we may well transition from each phase in the cycle to the next much faster than was the case historically. Indeed, the team believes risk-asset leadership is already shifting from “early cycle” to “mid-cycle”. So not only was the recovery much faster, but the duration of the cycle itself is likely to be shorter. The three reasons they cite for this are: continued accommodative monetary stimulus, elevated savings rates, and a strong recovery in the labour market.
But what does this mean for investors? In a follow-up strategy note, Morgan Stanley proposes that at this point in the cycle, investors should consider increasing the quality exposure in their equity investments, and downweight the quality exposure in their fixed income assets, in other words, increase exposure to more high-yielding assets. Be sure to read the article by Duane Cable and Sumesh Chetty, in which they discuss how they are seeking a balance of exposures in the Ninety One Cautious Managed Fund.
There is also a view building that we are witnessing the start of a new commodity supercycle, so look out for an article by our 4Factor team focusing specifically on platinum group metals, and the reasons they are bullish on this sector.
The rand has been one of the best-performing currencies over the last year and the South African bond market, having been downgraded to junk status, has started to regain its composure. Can it last? Peter Kent and Malcolm Charles analyse the reasons for the rand’s remarkable recovery and consider the factors that will influence its trajectory in the months to come. They also consider the outlook for the domestic bond market, concluding that it is attractive not only relative to our emerging market peers, but also to US treasuries and inflation.
Our final article in this issue shares some thoughts from Hendrik du Toit, our founder and CEO. The key insights I gleaned from this fascinating Q&A are that we need to price risk for the long term; mobilise capital for impact and contribute to sustainability with substance. We have learnt to price many things but not value them. Finally, with thanks to insights from economist Arthur Okun, “The market needs a place, and the market needs to be kept in its place.”
We thank you for your continued support and engagement with us.
Deputy Managing Director