The week kicked off with a manic Monday on Wall Street, followed by another selloff on Tuesday. The Nasdaq 100 now trades at 25 times forward earnings, down from 30 at the end of 2021. On balance, global markets have continued the week on this soft note, with the MSCI currently down 8.5% year-to-date.
But history provides a framework to compare the current selloff to other corrections caused by withdrawals of stimulus or rate hike cycles. For example, in May 2013 we faced a similar “Taper Tantrum” when the Fed was reducing bond purchases and threatening higher interest rates. Then, in Q4 2018, the S&P slid by almost 20% when the Fed decreased liquidity, only for 2019 to see a 31.5% recovery.
Many investors tend to anchor current “losses” to the recent peaks in their portfolio valuations. Factually, though, we find markets at now more or less at their October 2021 levels on the MSCI World, which still represents returns from global equities in a range of 12% since 1 January 2021, and 31.5% since January 2020, all despite the intervening Covid-induced uncertainties.
There is no doubt that corrections and crashes cause investor pain – and timing also plays a role for those investors who have only recently increased the equity weightings within their portfolios.
Unfortunately, we cannot call the trough in the current correction phase, nor the pace at which a recovery could take place. What reassurance we can provide to our clients is that their portfolios are underpinned by a robust investment philosophy with a bias to quality, and that the vast majority of underlying holdings comprise unleveraged companies with high returns on capital employed (ROCE). These companies are far less vulnerable to a higher inflationary environment and the possible materialisation of up to five rate hikes that could be implemented by the Fed this year.
We therefore take comfort that these companies will be worth more in years to come, irrespective of short-term share price volatility. As such, market corrections provide an opportunity to buy appropriate equities off their recent highs. Empirically, this strategy was proven to be correct in the immediate aftermath of the Covid-induced crisis in 2020 when investors would have been handsomely rewarded for buying “quality”.
“Confidence in a forecast rises with the amount of information that goes into it. But the accuracy of the forecast stays the same.”
– Dean Williams, Batterymarch Financial Management
Global News
- It has been an ugly start to the year in the stock market, with the S&P 500 index almost 10% below its last high, which was reached on the first trading day of 2022. The Nasdaq 100 index is off nearly 15% from its peak in November, while the Russell 2000 Index of smaller companies is down almost 18% from its latest high.
- The Federal Reserve has taken a hawkish stance and indicated it may increase interest rates from March. The Fed’s comments are prompting investors to double down on their bet on value shares for this year, with Europe’s banking stocks surging on Thursday. The UK’s FTSE 100 index, which has a large exposure to value and cyclical shares, also gained, benefiting from the rotation out of expensive stocks and into cheaper markets.
- There was a plunge in the shipping rates during early 2020 as the pandemic took hold and lockdowns were imposed, and then 2021’s surge in prices, thanks to pandemic-related supply chain blockages – which was itself highly inflationary. However, on the positive side, the cost has now returned to the middle of the past decade’s range. This tells us global trade may be returning to pre-pandemic normality.
- The United States and NATO have given a formal response to Russia’s demands that NATO pull back forces from Eastern Europe and ban Ukraine from ever joining the alliance, amid escalating military tensions in Eastern Europe. Russia has insisted for weeks that the US provide written responses to the Kremlin’s demands before it decides on the next course of action, while asserting that it has no plans to invade Ukraine. This stare-down is also proving to be a catalyst for volatile equity markets.
- Google has announced a new plan to stop using cookies to track people’s web browsing habits; this after its previous proposals were roundly criticised. US tech giants are under increasing pressure to overhaul the way they collect data – Google was fined 150 million euros by France earlier in January over its cookie policies.
Local News
- Ironically, despite all the volatility in the offshore counterparts, the JSE’s ALSI is essentially flat year-to-date in rand terms, but is up nearly 3% when measured in dollars, as the rand has had a strong start to 2022. The local currency had gained more than 5% at one stage, before retracing slightly to be 2.7% stronger than the levels at which it ended 2021. Based on our quantitative and fundamental research, we feel that rand strength continues to be unsustainable over the medium term.
- As predicted last week, the Monetary Policy Committee (MPC) decided to raise interest rates by another 25 basis points, taking the repo rate to 4% and the prime lending rate to 7.5%. Although the decision was in line with consensus forecasts, some expected a more aggressive hike of 50 basis points, believing domestic inflation is running well ahead of target and that South Africa lags other emerging economies in the tightening cycle as the US Fed turns increasingly hawkish.
- According to political commentator, Justice Malala, tourism minister Lindiwe Sisulu should be fired after she last week told the nation that her boss, President Cyril Ramaphosa, was effectively lying when he said she had apologised for insulting the judiciary and attacking the constitution. Where in the world do a leader and his organisation – in the private or public sector – allow such brazen insubordination to stand?
- The Standing Committee on Public Accounts has launched its own probe into public fund misappropriation allegations against the ANC over CR17, which surfaced in a leaked audio recording. This is despite the matter already being with the Public Protector.
- This comes as Public Protector, Busisiwe Mkhwebane’s, office received a complaint about a potential breach of ethics by President Ramaphosa over the use of taxpayer funds to pay for his 2017 election campaign. We have to question whether this can be substantiated or if it’s simply more RET pushback and remain concerned these attacks on the President will only intensify as we approach the ANC electoral conference in December.
- During an 18-month investigation, the Special Investigating Unit uncovered alleged fraud in several cases during an investigation into 211 Covid-19 procurement contracts in Gauteng. The unit launched the probe after being alerted to alleged irregular and unlawful conduct by health department officials during the procurement of personal protective equipment for Covid-19.
- Fiscal consolidation remains critical for long-term stability and policymakers have their work cut out, writes Mamokete Lijane ahead of the National Budget Speech set for 23 February. In 2020, SA looked like it was on the cusp of fiscal distress. The panic about access to financial markets experienced into the middle of 2020 has since abated. GDP has rebounded and credit rating outlooks were adjusted to stable. Nonetheless, growth projections for this year and next remain tepid.
- Telkom is awaiting clarity on the scope of the investigation into allegations of corruption and malfeasance, in its affairs dating back to 2006. This follows President Ramaphosa authorising the Special Investigating Unit to probe Telkom’s ill-fated forays in Nigeria and Mauritius. Government holds a 40% stake in Telkom. The unit will include in its probe possible maladministration regarding the disposals of iWayAfrica, Africa Online Mauritius, and Multi-Links Telecommunications.
- The Commission for Conciliation, Mediation and Arbitration (CCMA) has found that a company firing a woman for refusing to be vaccinated acted fairly – and her sacking was upheld. The company’s executive committee voted in favour of a mandatory vaccination policy in 2021.
Sources: Dynasty, News24, BusinessLive, BizNews, AFP, Bloomberg, Washington Post, New York Times, etc.
