The Navigator is Anchor’s quarterly review of the major themes affecting markets and gives an overview of our current strategy and asset allocation. Click here for the full document.
The purpose of The Navigator is to provide our clients with insight into Anchor’s thoughts on various asset classes and our near-term market outlook.
The first half of 2022 was painful for investors, with global bonds experiencing their worst start to the year since records began in the 1900s. Equities fared slightly better with the worst start to a year since the 1970s and the fourth-worst start on record. Domestic bonds and equities were somewhat insulated from the fallout because of the composition of South Africa’s (SA’s) export basket and our self-sufficiency in food supply which has allowed domestic asset classes to return more moderate negative outcomes. We know that these events have been painful for investors, many of whom are seeing their investment returns and wealth decline at a time when fuel prices, food costs, and interest charges are taking a greater bite out of their monthly budget.
Central bank rate hikes, and the associated tightening of financial conditions, are a blunt tool to tame inflation which is being fuelled by an inadequate supply of commodities and Russia’s invasion of Ukraine. Central banks cannot address supply chain blockages, they are unable to grow commodity supply, and they cannot increase food supply. The rate hikes instead impede job creation and curb consumer spending, meaning that we all must make do with a little less. The cruelty of rate hikes is that those who can afford it the least will feel it the most. Still, we have seen in the past that this is preferable to tolerating inflation eroding our savings, our economy, and our way of life.
We know that, as time passes, we move through economic cycles and, like with all previous downturns, this will end, and the uptrend will return. No one can, with absolute certainty, predict when the cycle will turn or where the bottom is. We do know that valuations are becoming increasingly attractive which serves to buffer the effect of further economic disappointments. We are also aware that US growth expectations are sliding ever lower, dragging inflation down with it. Similarly, we understand that yield curves are beginning to price in rate cuts for 2023, suggesting that the market senses we are approaching the end of this part of the cycle. In our view, bond markets are waiting for the first signs that inflation is coming down and equity markets are looking for signs that earnings have bottomed. It is difficult to say when either of these events will occur.
We have previously stated that Anchor believes in a balanced approach toward investing and diversification. Everyone’s circumstances are different, although for most being fully invested in one asset class, either domestically or abroad, does not make sense. We always consider long-term objectives, and we attempt to construct sensible portfolios which are diversified across asset classes and regions that will, in time, get you to your investment objective. Investors who have been diversified have seen less damage to their portfolios, albeit that the past quarter (2Q22) was still painful.
We caution against the capitulation trade of withdrawing from markets. It might well get worse before it gets better, yet we know that, over time, the investment portfolios of those who remain invested significantly outperform the portfolios of those who move to the sidelines after a period such as we have just had. Now is the time for cool heads and uncomfortable patience with markets.
We leave you with a quote by legendary investor and CEO of Berkshire Hathaway Warren Buffet who famously wrote in a New York Times opinion piece entitled Buy American, I am in 2008, during the global financial crisis (GFC), that “… you should be fearful when others are greedy and be greedy when others are fearful.” As asset prices come down, we at Anchor are seeing increased opportunities in markets, both locally and abroad.
The key to successful management of your wealth is an ability to understand the changes to the world in which we live and to adjust (when necessary) your investment portfolios accordingly. As a boutique asset manager, we can navigate these twists and turns of global developments more readily and our team of experienced investment professionals are ideally suited to understand and react to a rapidly changing environment as we pursue exceptional investment outcomes for our clients.
For the full report and our view on each asset class, click here.