Wrapping up this Quinquennium
24 December 2024
Quinquen what? You’re forgiven if you didn’t know that a quinquennium is a specified period of 5 years.
As Financial Advisors, we are regularly invited to talks hosted by different Asset Management companies, where we get to hear from top economists, political analysts and portfolio managers. Almost without fail, you walk out of these sessions feeling positive, with a more balanced and realistic view of the world. Our opinions might otherwise be informed by the news, and even when the news is accurately reported, it is reported precisely because it is newsworthy – and bad news sells.
As we wrap up the year, we aim to share a more balanced, realistic story with you, focussing on the past five years.
We’re moments away from the beginning of 2025. This means that since the dawn of 2020, we have experienced a full five-year period. Five years happens to be a great investment horizon, and this five-year period has been packed with wild, unexpected events. Arguably, so has every period of history (depends on who you ask). History doesn’t necessarily repeat itself, but it does rhyme. The Covid-19 pandemic was one such event which fell at the beginning of this quinquennium.
Can you remember where you were for Christmas in 2019? At the time, there were reports of a virus in China, but it wasn’t making the headlines. As we cheered 2020 across the line, no one knew that we were about to experience the biggest pandemic in 100 years. Which is also a good reminder that history is dominated by improbable events. These events are very seldom predicted but have a massive impact on the world.
The Covid-19 pandemic triggered a market crash, wiping out 30% to 40% of stock market values worldwide. It was a scary time. Sir John Templeton once said that the four most dangerous words in investing are “this time it’s different”. Living through lockdown, you couldn’t help but ask, “what if it really is different this time…what if the markets don’t pull back?”
In the space of just 9 months, markets recovered completely. Templeton was right in this instance, because if you had acted as if things were different during the crash, you might have withdrawn your investments and retreated into cash or gold, and in doing so, you would have baked in a 40% loss; a disastrous financial setback.
Things started to open up in 2021, but then the madness also set in – with consumer demand cycles having been thrown out during the pandemic. People wanted and needed to buy things – a lot of things to make up for lost time – but the goods had not been produced owing to lockdowns, and the ports were jammed with backlogs. People were prepared to pay higher prices than they should to get their hands on goods which were in short supply, which was the start of an inflation cycle which has meaningfully impacted the markets and investments – not directly, but indirectly, owing to the increase in interest rates.
Inflation is controlled through the blunt tool of increasing interest rates. Higher interest rates mean that it costs people and businesses more to borrow money, and in borrowing less, they spend less, and the prices of goods start to come down. This is precisely what central banks want. They need to preserve the value of a currency, and to do so, they need to stop the rapid increase in consumer goods prices, otherwise known as inflation.
In South Africa, interest rates reached 8.25%, which means that it cost most people 11.75% to borrow capital (the prime lending rate is always higher than the repo rate). During this time, it’s been tempting for people to keep their money in cash (e.g. fixed deposits or high-interest bank accounts), where rates were above 8%. You can also understand why the banks were paying you so much to deposit your money. They could give you, say, 9%, and lend that same money to someone else for 11.75% ! This is a simplified explanation, but it’s not too far from the truth.
Keep this 8% return on cash in mind, because we will soon look at how markets have performed over the same period. Interest rates started to come down in September this year and are currently sitting at 7.75%. Returns on cash have followed suit.
There was another significant event during this period: Russia’s invasion of Ukraine. This happened in February 2022, and it was truly – much like Covid – unexpected. No one predicted it. Having just recovered from the pandemic, offshore markets were once again thrown into a panic, as people asked questions about World War III. Europe worried about the supply of key commodities like gas for the winter. Offshore markets dipped 20% that year. South African markets managed to hold ground but saw no growth.
Before discussing South Africa’s specific mix of challenges during the quinquennium, it’s worth wrapping up the market numbers for the period:
South Africa’s index, the JSE, has grown an average of 12% per year, since 2020.
Offshore developed markets, measured by the MSCI World index, have grown 13.7% per year since 2020 (measured in Rands to keep an apples-for-apples comparison).
Had you instead stayed in the safe harbour of cash for this period, you would have seen average returns of just 6.3% per year. And that’s despite cash returns having been unusually high for 18 months of this cycle.
Of course, few investors have 100% exposure to “the markets”, with portfolios being balanced with equities (company stocks or “the market”), bonds, cash and property. The point is: exposure to assets other than cash – particularly equities – is essential to ensure that your savings see growth in real terms over time. Equities will always outperform cash in the long term, and this outperformance is necessary for your savings to grow ahead of inflation (this is what is meant by “real” growth).
The past year has seen particularly strong market growth in South Africa, with the JSE having grown 19.5% in the 12 months to 17 December 2024. But if you cast your mind back to Christmas last year – we were in dark times. We were in Stage 6 Loadshedding. Eskom management was being poisoned. Transnet was in a mess. Elections were looming on the horizon, and we’d been through Ramaphosa’s buffalo-cash-in-the-sofa scandal. South Africa has a long history of pulling itself back from the brink, but once again, you couldn’t help but think – what if it’s different this time?
Instead, the elections passed us by, and we got the best possible outcome that we could have hoped for. Not even the most optimistic analyst was prepared to predict a form of coalition government between the ANC, DA and other smaller parties. Loadshedding bid us farewell ahead of elections, and it seems to have taken its final bow. The lights have stayed on for over 260 days.
You might say that’s all good and well, but for those based in KwaZulu-Natal, the picture isn’t quite so rosy. In July 2021, we had the so-called Zuma riots, resulting in 250 deaths and R50bn in losses. Then we had the flood in April 2022 – 460 people dead, 40 000 people displaced, R2bn in losses – described as the worst flood in KZN’s history. The rise of the MK Party was a Political Scientist’s marvel, but having secured 45.3% of the vote in KZN, they still didn’t manage to secure the province.
Furthermore, economic data shows a province that is – at worst – stable. KZN is the 2nd largest contributor to GDP after Gauteng, and the contribution to GDP has been reasonably stable over the past 10 years, dropping just 0.4% since 2012, currently sitting at 16%. The Western Cape by comparison contributes 14% to GDP. Furthermore, when we look at the industries that are particularly important to KZN, being Agriculture, Forestry and Fishing, the contribution to GDP has increased slightly over the past 10 years to 15.8%. This is despite what the province has been through over this period.
More recently, Trump won a 2nd term, campaigning on deporting migrant workers, reducing taxes and increasing tariffs on imported goods, especially from China. While these have made him popular, they will not combine into a good economic broth, as the net result would be a return to an inflationary environment. This may already be evidenced in the Fed’s stance that there will be fewer interest rate cuts in 2025 than originally anticipated. Trump officially takes office on 20 January 2025, and without doubt, there will be fireworks – but the extent to which his campaign promises translate into economic policy is yet to be seen. Fortunately, it’s not the first Trump presidency, and markets are better equipped to interpret his Trumpisms and the likely repercussions.
Bitcoin has hit record highs off the back of Trump’s support. As usual, this is when clients start to ask if they should buy Bitcoin. It goes without saying that the price of Bitcoin is extremely volatile, and so if history repeats or rhymes, what goes up will go down. Buying at a historic high is not usually a good strategy. Our advice is that if you want to go into this space, use your “play” money, but do not risk your hard-earned retirement savings.
Allan Gray coined the statement: investments are bought, not sold. As independent advisors, we’re not in the business of selling investment portfolios which promise disproportionate returns. We believe that, if something sounds too good to be true, it probably is. And as counter intuitive as it may sound, we’re not even in the business of promising the highest returns available in the market. If someone says they know which investment is going to give you the highest returns, they are possibly lying or delusional. We’re in the business of offering risk-related returns, and by now, 30 years on, we’re clear on how to invest in such a way that you get returns in line with your risk profile. The rest lies in allowing those returns to compound over time.
