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Over the past decade, it has become routine that experts will warn about the inherent risk of investing in stocks. And each time they are seemingly proved wrong.  

The year that has passed has proved to be no different, as did the one before, where in the face of an almost complete closure of the global economy, investors should have feared the worst.

Yet, the JSE all share index ended 2020 with a 4.1% gain, something that would have seemed fanciful as it crashed 37% from its high on January 1 to its low on March 19. The tech-laden stock markets in the US were even more impressive, with the Nasdaq index up a huge 44%.

Many active fund managers would have told clients to take some profit and some risk off the table. The outlook for Covid-19 and potential for more lockdowns was still cloudy. Vaccines were starting to be rolled out in rich countries, but their unequal distribution raised concerns about the sustainability of the global economic recovery and whether supply-chain constraints would persist. 

Those constraints, together with big pent-up demand due to the enforced closure of developed economies in 2020, were starting to translate into higher rates of inflation. While this was at the time seen as “transitory”, with policymakers, including our own Reserve Bank, worried more about safeguarding the recovery rather than fighting inflation, the risk of an unexpectedly fast policy tightening cycle that could choke economies was still on the mind of investors.

The so-called “everything rally” had been driven by huge monetary stimulus from central banks since the global crunch hit around 2007, and was then reinforced by aggressive fiscal interventions as Covid-19 struck. Some are arguing that this is over as central banks prepare to tighten policy. Inflation now running and staying at levels twice official targets might be a game changer. Still, an investor might ask where they have heard that before. Each time they have been challenged by falling assets, central banks have blinked and opened the monetary taps. Will it be different this time?

There are also SA-specific reasons to be concerned about the outlook for stocks. While 2021 GDP growth might exceed 5%, this will only be in the context of a slump in 2020 that was the worst in a century. The government isn’t optimistic on the outlook, predicting a sharp slowdown to an average of less than 2% over the next three years. On the face of it, it’s not an environment that’s conducive to pricing aggressive growth in profits. 

Even with the body blows ranging from the looting and mayhem in July to the local discovery of the Omicron variant, the JSE ended with a gain of 24% in 2021. Those investors who had the foresight to diversify and maximise their allocation of offshore assets would have done even better. The S&P 500 index gained 27%, equivalent to a 38% gain when converted into rand. Over five years, local investors invested in the MSCI world index will have more than doubled their money including reinvested income. On the JSE they would have made 46%.

Markets have had a volatile start to 2022 and it’s difficult to argue against caution. The difficulty is deciding where to park your money.

Switching to cash would seem to guarantee capital losses even as the Bank moves to gradually tighten policy. Assuming that its model is correct and the repo rate rises 25 basis point each quarter in 2022, that will take it to 4.75%, barely above the 4.3% average inflation rate it expects for 2022.

In SA, investors do at least have some of the juiciest bond yields around, which may rise even further, depending on interest rates and fiscal policy, creating even cheaper entry points ahead. A “safe” asset offering an annual coupon of 8% is not something to be sniffed at.

Perhaps this will be the year that active managers will earn their keep and pick the winners in a rollercoaster of a year. The “everything rally” might well end, but that doesn’t mean there’s no opportunity in stock markets.

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