London-based founding director of OMBA, Mark Perchtold, shares his insights into how those investing offshore can avoid getting palpitations each time they see whipsaws in investment markets. This specialist asset manager defrays risk through only investing client money into low cost Exchange Traded Funds – and by diversifying across numerous geographies. While the strategy cannot completely avoid the impact of sharp daily market moves, it is the best wealth creation strategy for those taking a longer view.
Excerpts from the interview with Mark Perchtold
Mark Perchtold on the volatility in the US markets
Volatility, certainly the name of the game in this current period. I mean, we can expect more, to be honest. I don’t think it’s the end of up and down days of of extreme nature of the next sort of 6 to 9 months as you get economic data and inflation data, obviously the inflation print coming in lower than expected was a very big boost for markets because everyone wants the Federal Reserve to become a little bit more dovish and perhaps hit peak rates sooner or maybe not hike as much of the incremental hikes that are coming. So, you know, in financial markets, they say when the US sneezes, everyone else catches a cold. And the US is still a major driver of how broader markets globally will perform. Inflation data are running hot in the US, causing the Fed to hike rates. And obviously the whole bond curve shifting upwards has been a massive knock-on for markets this year, both equity and fixed income. And I think, you know, earnings season is still not complete, but you know, we’re quite a long way through it. And a lot of companies have actually been beating their guided earnings, but many of them have guided down on a poor outlook. And so, you know, you’ve had a really big sell-off many days of the market and you’ve had big bifurcation across various equities in the market. So you’ll see some stocks rally strongly, post earnings announcements, others fall brutally. And I think that’s just because investors are so unsure of the outlook. And it’s very hard both for directors of companies and CEOs to gauge how things look. But in general, if financial conditions are easing, which is obviously one of the big inputs to that, being interest rates, people are quite optimistic that that growth will continue.
On whether this is the time to be cautious or should we invest more
I think the markets are always very forward looking. So, you know, stock prices reflect the estimation of the future. And I don’t think from an economic perspective, we’re out of the woods. I think you could still see negative GDP prints from many developed countries around the world over the course of the next 6 to 12 months. But the market’s have been anticipating that. So that’s not necessarily new information, you know, tightening monetary conditions, slowdown globally. It will cause equity prices to fall, but that’s already been priced in for a large part of this year. So I think from an economic point of view, I don’t think we’re out of the woods. I think, you know, households across many countries, certainly in the UK, US, Europe, many other countries where interest rates have risen, are going to feel the pinch. You’ve got the double whammy of higher prices on the one hand, particularly for things like energy, coupled with high interest rates. So if you’ve got a mortgage in the UK, for example, you know, if a fixed mortgage which is flicking into floating over the next 24 months, you’re quite worried and so you might tighten your belt and therefore spend less. In the US, I think there’s less of a worry on the consumer side because of mortgage rates that have gone up, you know, close to 7%, 6.8% in the 30 year mortgage. Because the good thing versus the GFC is that most mortgages in the US now are fixed for the long term, so it won’t hurt the consumer as much. But despite that you’ve got high energy prices. So I think the economic data is still likely to be weak over 6 to 12 months. So we can expect bad headlines as GDP data, prints PMI’s print, as I think inflation remains elevated. But it is somewhat peaking and coming down as we’ve seen by the print yesterday. And I’ve argued, as you know, for a long time, that I think inflation over the medium term will definitely decline because you’ve had demand destruction, you’ve got the issues from supply chain bottlenecks abating, you’ve got supply coming online in commodities. So our view is that inflation will continue to come down. Therefore, central banks won’t be as hawkish, they’ll become more dovish, and the market will then reflect a better outlook. But the actual pain in the economy, I think, will be felt over certainly the next 6 to 12 months.
I think we’re forming a base, you know, calling the bottom, as I said last time we spoke, is impossible. And so our view is one should begin accumulating equity whenever you have drawdowns north of 20%. You know, it may be a 40% drawdown but it may not. Drawdowns aren’t always that deep and we’ve already had meaningful drawdowns. The Nasdaq is down over 30% – that’s a meaningful number. Certain stocks, bluechip well-known companies, are down over 50%, they’ve halved in value so that’s an opportunity to pick up good businesses that generate cash flow, that are profitable, at a discount. So our view is that on the equity market side, it’s a time to begin accumulating with the view that there could be a lower level. It’s impossible to gauge because you’re going to get bad headlines over the next 6 to 12 months. But economically, we’re not out of the woods at all. So I think it’s hard to gauge exactly where we are in the cycle. I think until you see interest rates and base rates coming down from central banks, until you see those declining, we’re not going to see a big boost in economic activity.
On what he’s telling South African investors, particularly with regard to positioning portfolios or investments to take account of this extreme volatility
I think it depends on the nature of the investor. You know, what percentage of your assets do you want in your home market? What are your future liabilities in your home market? How much are you going to need to spend for example, on children’s education, to service your mortgage, to live in SA? And the question then is how much you want to take offshore? If you were objective and you landed on the planet today, how much would you allocate to South Africa? You know, and people wouldn’t typically answer 50%, 30% to 20%. If you looked at the economic and political landscape perhaps in South Africa versus other countries around the world, you might say it’s ridiculous for me to have half my money in this country, but it depends how much money you’ve got, and it depends on your future liabilities in Rands. So the conversation is dependent on the personal circumstances of each family with whom we work, or the investor when they go offshore. Our views always being that, picking single stocks is great if you are right, but a lot of active managers who pick single stocks struggle to beat the broad indices. We use the broad indices as a building block, but we are still thoughtful about the country and sector because there are pockets of opportunity from a macro perspective. Diversification is key. I mean, self-directed investors would love to have a stock portfolio and I was one of these when I was a student. I had my portfolio of ten or 15 shares, I thought I was really smart, I’d look at the financials, I’d pick some shares. Half of my shares happened to be tech companies. We then had the tech bubble and bust and it was my first lesson, and I sort of lost my shirt in markets in the late nineties, early 2000s where I thought I was really smart. And then, you know, if you have ten or 15% holding in one name and it goes down 50, 60, 70%, you really feel the pain. When you have a portfolio of thousands of underlying companies globally you don’t have that single stock risk blowing you up, you have broad market beta that can hurt you. Sure, in a year like this in particular, but there’s no single name that will take you out.
On his opinion on saving – whether to put a certain amount away every month or if you’ve got a lump sum, do you spread that out over a period of time?
My general view is that you should have enough as it pertains to South Africa. You should have enough money available to live your life in South Africa comfortably, and everything in excess of that should go offshore and be globally diversified. It depends how much people have, how much excess liquidity. Our view is don’t time the rand. Over time, the rand will devalue due to traditional economic theories like inflation parity in purchasing price parity. Forget about idiosyncratic South Africa risks, just good old economic theory will show you that the rand will devalue because it’s got higher inflation than many other developed countries. So that’s an expectation. Trying to guess when is the optimal time to move rands out is somewhat of a mug’s game. Of course, opportunities where you know, if the rand is particularly strong, maybe you do a little bit more that particular year, but on an annual basis or even more frequently, you can just externalise your excess liquidity and build a global portfolio.
See Also
Inflation, fear not. Central bankers may be slow, but the job may get done on time.
Nasdaq bulls’ remarkable optimism holds firm as the Fed and earnings sting
How to maximise long term investment returns by overcoming cognitive bias
