With the flurry of new-year market outlooks behind us, there are a few less-highlighted themes that have piqued our interest.
Just like the walrus and the carpenter in Lewis Carroll’s Through the Looking Glass, investors are hungry. Hungry for certainty and safe-havens, post the exceptional returns in most global asset classes that occurred after the March 2020 Covid-19 crash. Caution and uncertainty now plague the global environment, prompting a need to re-assess the global outlook.
A poem within a narrative, The Walrus and The Carpenter is a tale of bizarre phenomena and latent threat, a ‘new normal’ where strange things happen. The sun shines at night, and oysters – who have no feet – put on their shoes and walk down a beach. This is hardly comforting to Alice who is looking for a way out of the forest of confusion where she’s been wandering.
Sound at all familiar?
High economic and job uncertainty, yet workers are resigning
According to Statistia, some 114 million people lost their jobs in 2020 following the global pandemic and resulting lockdowns. This is a staggering figure and would be expected to lead to people clamouring to return to work. And yet, they aren’t. In fact, many have weighed up their employment options and decided to either remain out of the workforce, or to resign. This has led to a shortage of labour around the world, especially within the US, in what is being termed “The Great Resignation”, where some 33 million Americans have quit their jobs since March 2021. A shortage of labour pushes wage prices up and can give rise to structurally higher inflation.
Inflation, inflation, inflation
Just as ‘location, location, location’ is the guiding adage in property, so protecting against inflation is (now) the most talked about challenge in investment markets. Inflation is rising almost everywhere, and fast. The US is seeing the highest rate of inflation in forty years, with the latest number a whopping 7.5%.
For over 20 years, the world has been in a deflationary phase. As a result, central banks have been cutting rates, leading to rising valuations and markets. The recent inflation spike raises the possibility that we might enter a longer-term inflationary phase. This has the bears increasingly rattling the gates, particularly as global interest rates rise in most key countries.
An unexpected factor driving prices higher, especially commodity prices, is the huge focus on ESG issues. This has, for example, led to reduced funding for fossil fuel companies, and an attendant price increase of the underlying commodity. This has added further fuel to the inflation fires (pun intended).
All evidence points to volatility being a key market characteristic in 2022 and beyond. Whereas global equity markets rose inexorably over the past two decades – admittedly with a few sharp (but short) falls — this may not be the case going forward. Against a backdrop of higher inflation, rising interest rates, high prices in many asset classes, and some growing geopolitical risks, volatility seems to be a given. Derivative and algorithmic influences have increased too, adding to the speed and aggression of market moves, both up and down.
Whilst sticking to one’s long-term strategy is a given for any investor, the expected rise in volatility may provide tactical asset allocation opportunities, particularly for institutional investors.
Foreigners are largely gone, yet the JSE rallies
For decades, a common understanding among investors was that foreign interest in local shares played a leading role in underpinning the JSE and that, if foreigners sold their holdings, prices would fall.
Over the past three years, foreigners have sold an estimated R221 billion of SA equities and curiously, the South African equity market did remarkably well. One can only imagine the further possible upside were foreigners to return en-masse to our markets. This could happen if they perceive good value and/or a more supportive macro-economic environment.
A key turning point?
There is a growing sense that active management and value investing, which have struggled over the past two decades, could be set for a significant turnaround. That could also provide significant alpha opportunities.
The investment markets are complex animals, where peering through the Looking Glass is never simple, and clarity can be elusive. That may be even truer now. And like the ill-fated oysters in Carroll’s poem, beware of following the advice of tempting strangers – they may not necessarily have your best interest at heart…