The world is changing fast and to keep up you need local knowledge with global context.
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By Rocco van Zyl and Ruan Breed*
The S&P 500 Index reached a (new) all-time high of around 4 800, towards the end of 2021, before the latest market pullback. Whilst the reasons as to why the index has had a pullback are well documented, many have resorted to ‘panic selling’ and cashing in, or those who were sitting on cash before, have simply opted to continue doing so.
However, once you take into consideration that there has been a total of 39 market corrections (a drop of 10% or more) for the index since 1950, or on average at least one every two years, it shows you that there have always, without exception, been opportunities for investors in times of panic and distress. If this wasn’t the case, we would never have reached what they call “an all-time high” as early as two or three months ago. Or any new all time highs for that matter. The mere fact that indices such as the S&P500 reached NEW all-time highs, is exact proof that market corrections/pullbacks present the perfect buying opportunity for investors to be able to enjoy the ride to the top again. Because it will happen.
Ironically, it is in times of chaos that opportunity presents itself, especially for those investors with cash available. Recently, especially the week of of 14th – 18th March, saw the S&P 500 index boast a weekly gain of just over 6%, yet the index is still comfortably below its highs. Which means opportunities will always be there for those who can stomach the inherent volatility of equity markets, and patiently stick to a long-term plan.
Investors who are currently sitting on cash, especially in the current low interest rate environment, may benefit by considering some options:
Option 1) Continue sitting on cash – This is, of course, the most obvious option. In the short-term, it protects against market volatility and uncertainty. However, to achieve inflation-beating returns in the long-run, cash simply won’t deliver that, unfortunately. It is imperative to consider further options and be comfortable with taking on a bit of risk.
Option 2) Increase exposure to equity: With a relatively strong rand, and with a recent correction for offshore markets, now may be a great time to ‘buy the dip’ and increase exposure to offshore equity. It is the proven method to achieve inflation-beating returns in the long run, however one needs to invest according to their risk profile and understand the risks that come with being invested and having exposure to equity.
Option 3) Purchase property: Apart from certain bubbles in South Africa, the property market has been stagnant, at best, over the past five years or so. What was traditionally a very ‘safe’ form of investment, has been a thorn in the backside of many South Africans, when you consider the rapid increase in rates and taxes, levies and etc., all before throwing in other taxes, such as Transfer Duty, Capital Gains Tax (if you lucky). Although it is always an option to expand your property portfolio, it isn’t necessarily as ‘clear cut’ as it may have been in South Africa, especially in the years when property was booming, and we had an economy that wasn’t contracting in real terms. Another big disadvantage of investing in property, is that it isn’t a very liquid investment.
Option 4) Invest in Income funds: A great alternative for conservative investors who are uncomfortable with exposure to equity markets, but would like better returns than cash, and an investment than is a lot more liquid than property. At Brenthurst, we have made use of local Income funds, with great success, for several years now. Some of the funds we used have consistently produced returns of inflation plus 3% – 4% per year, with less volatility, and reduced risk involved, when compared to equity funds. This kind of fund is an extremely good alternative for investors not wanting to adopt a lot of risk, but who would still like to achieve inflation + 3% returns.
If investing in equity markets are too risky for you, Option 4 will without a doubt be the more suitable solution, instead of sitting on cash.
Inflation is lurking, and your cash investments will have nowhere to hide:
With inflation in America reaching 40-year highs, in the UK reaching 30-year highs, the war in Ukraine persisting and disrupting supply chains and oil prices worldwide, you can be sure that inflation will rise in South Africa beyond the current 5.7% for February 2022, as published by Stats SA.
If you think of a basket of normal products consumers use daily, such as basic food, clothes, entertainment etc., all of these have two main drivers of their input price:
- Fuel: to transport the different products to the required location
- Electricity: to run production processes to produce the final product/food
The prices of these two elements have risen much faster than other items in the inflation basket, well above 10%, even before the pandemic and war broke out. Therefore, you can bet your last penny that actual inflation for the normal guy on the street who likes to have a cold beer on the weekend while braaing A-grade steak and commuting in a Toyota Fortuner, will definitely consume products and services at inflation closer to 10% and easily beyond that. If you need proof, here it is:
With reference to the above graph, it is evident that there is a significant difference between the headline inflation of 5.7% and inflation on products we actually consume.
It is this mentioned fact that makes it all the more crucial for investors to look for alternative investment options other than cash or money market investments.
Inflation can and will come for your investments harder than before in the next 12 – 18 months, and there will be only one winner between inflation and cash investments.
Even if you are a risk-averse investor, there are options available at the same level of risk as cash/money market investments, with higher yields.
- Rocco van Zyl is an advisor at Brenthurst Sandton [email protected]. Ruan Breed is an advisor at Brenthurst Stellenbosch [email protected]
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