Dear Clients
It is Friday, 24 December. Christmas Eve. From all of us at HMA, we’d like to wish you happy holidays and a safe journey into 2022.
One of the most striking features of the past two years has been the challenge in perceiving the passage of time. It feels as if 2020 and 2021 have been squashed together, with time moving slowly but passing quickly (to borrow the words of Alice Walker, author of The Colour Purple). Was the first Lockdown as far back as March 2020? Is it possible that we have reached the end of 2021, with Covid-19 still playing such a significant role in our lives? Was the start of our vaccine roll-out in South Africa really only six months or so ago? Scientists have validated this sentiment, saying that the pandemic has disorientated us by changing our daily routines and messing with our annual milestones.
And then there was the July 2021 unrest in South Africa. While we would like to write it off as a once-off nightmare, it has shaken us to the core. But once again, the resilience of average South Africans should be the lead story here – it is remarkable how a large number of citizens stood up together to protect their neighbours and businesses. When the dust settled, you picked up the pieces and moved forward. The wheels of the economy kept spinning, and as far as the JSE All-Share was concerned, the needle hardly budged. Neither did the value of the Rand, although it has lost ground in more recent months. More on this later.
On the bright side, it has been a cracker of a year for your investments. After several thoroughly pedestrian years of growth for the JSE All-Share Index, the past year has helped restore even five-year growth averages. Over the past year, the JSE All-Share Index (PR) has seen 21.5% growth. Over the past five years, it has grown 45.1% – an average annual growth rate of 9% per year.
The Rand, in contrast, has toyed with our emotions. You may recall that during the initial Covid-19 related market crash in March/April 2020, the Rand slumped to R19.00 to the US Dollar. In June this year, it managed to recover to under R14.00 to the US Dollar, but has now climbed back to R15.70. While this volatility is often difficult to stomach, it is important to remember that some of what we perceive as the ongoing, long-term devaluation of the Rand is exaggerated by inflation. So long as inflation in South Africa is higher than the market you are comparing us to, the Rand will constantly lose value to that currency. So long as your income is increasing with inflation, or the growth of your investments is benchmarked to include inflation, your buying power – even in foreign currency terms – hasn’t weakened quite as much as you may think.
There are currently a few topics that are best avoided at dinner parties, ranging from vaccination to loadshedding. South African politics – in general – is firmly on that list. These conversations have the tendency to spiral into a widening gyre of hopelessness. It can be massively unpopular to offer up any fact or opinion that derails this train into the desert of despair. The macro-economic explanation as to why we think there is reason to be realistically optimistic about the future of South Africa makes for heavy reading, but we think the below excerpt from Allan Gray’s Quarterly Commentary, written by Tamryn Lamb, captures the essence of the message we’d like to convey:
“Stanley Lewis, the entrepreneur who created the modern Foschini Group, was fond of saying that “things are never as good as you think, and they are never as bad as you think”. This is true of South Africa today. Conditions are improving, and businesses will take advantage of this. The consequent economic recovery will happen despite and not because of the government.”
While it may be both justified and fashionable to be a dissatisfied South African, on another level many of us are deeply proud and protective of where we live. There are so many aspects to the South African experience that keep us here – the natural beauty, the lifestyle and the people. Perhaps this is why we wear our dissatisfaction so strongly – because we know we are capable of so much more.
We see each obstacle as another nail in an inevitable coffin, rather than the unpredictable, long and winding road traveled by an emerging, inclusive democracy.
As we look to 2022, there seems to be some consensus that, “year three of the pandemic will be better than year two, and Covid-19 will have much less impact on health and everyday activities” (The Economist). This experience will not be equally distributed, as wealthier countries with higher vaccination rates stand a better chance of a “more normal” year. Here in South Africa, there’s a possibility that we are seeing our fourth wave taper, with the number of new cases starting to trend downwards over the past few days. We send our sincere condolences to all of you who have lost loved ones during the pandemic; for many, the effects of the past twenty-one months will be felt for a long, long time.
As we enter 2022, it seems trite to say, “expect the unexpected” – are current levels of uncertainty really any higher than they have been in the past? For investors, Pieter Koekemoer of Coronation has this to say:
“We all know that long-term investing is a future-facing endeavour, meaning that investors should expect to be continuously challenged by uncertainty. It’s useful to remember that this is a feature of the system, not a bug. If you cannot find a way to embrace uncertainty, you are highly unlikely to be an efficient investor; in this case, your investments often won’t bring you much joy…”
We have included a useful chart which helps to explain the levels of growth that Coronation believes investors should expect over the next decade, compared to current investor sentiment.
Expectations from cash returns need to be tapered back in the current market cycle, while we should see risk-related returns within accepted historic ranges for multi-asset investments.
As always, thank you for trusting us with your investments. We have seen an exceptionally low number of withdrawals and transfers-out over the past two years, most notably almost none during the Covid-19 market crash, when investors were most susceptible to making a panic decision. This means that the vast majority of our clients have avoided baking-in any losses during the downturn, and have enjoyed the returns of the past year.
We wish you everything of the best for 2022.
Kind regards
The Team at HMA
When it comes to decision frameworks around offshore versus local investing, South African investors seem to routinely fall into the trap of making panic-stricken moves offshore in response to deteriorating local sentiment and rand weakness. We believe that investing offshore should always form part of an investor’s investment strategy, but it should be done with clear objectives in mind and a long-term focus, and be in keeping with your individual circumstances, risk tolerance and goals.”
Source: Allan Gray Quarterly Commentary Q3 2021, Tamryn Lamb