ADRIAAN PASK: Don’t fear the bear (market)

This year has not been easy for local investors. Local challenges such as relentless power cuts, deteriorating rail infrastructure, the country being added to the greylist of the Financial Action Task Force, higher interest rates and subsequently higher living costs have forced most to tighten their belts.

Offshore events such as the Russia-Ukraine conflict, the more recent war between Hamas and Israel, the slow recovery of the Chinese economy and a very concentrated US market have all caused increased volatility at home and abroad. 

The bad news is that markets will remain volatile in 2024. Elections and the direction of interest rate policy are known risk factors, but investors can expect the inevitable surprise or two.

Let’s talk about elections, which typically lead to policy uncertainty, which in turn causes volatile market conditions. 

The US, Taiwan, India, the UK, Germany and Russia are all expected to go to the ballot box next year. In fact, no fewer than 76 countries will vote in 2024, which accounts for 39% of countries. These nations represent 4.2-billion people and 59% of global GDP.

General elections will also be held in South Africa to elect a new National Assembly and provincial legislatures. With “Ramaphoria” long gone, the continued underperformance of state-owned enterprises and a raft of corruption allegations against top government officials, you can understand why capital has flowed out of a tentative and fragile South African market.

As for interest rates, opinions about whether central banks will need to increase interest rates or start cutting is a narrative that changes daily. This will add to market volatility next year. From April 2022 the Reserve Bank increased interest rates from 4% to 8.25%. The European Central Bank increased its borrowing costs from 0% in July 2022 to 4.5% at the last meeting in October. The big daddy of them all — the mighty US Federal Reserve — lifted its rate from 0.25% in April 2022 to 5.5% this year.

Only recently has US inflation started to come down and there are signs that the American labour market is cooling. It confirms research that it takes about 18 to 24 months for higher interest rates to filter through an economy. Despite the past few weeks’ Fed-induced rally — thanks to markets anticipating bigger than expected interest rate cuts next year — we think the risk of expectations not being met is quite high.

In short, nobody can predict with certainty what the results will be for markets over the short term, but we can confidently say things will be volatile. While this is hard to bear for many, equities are the asset class that most investors need in their portfolios to shield against the eroding effects of inflation. 

Given that a bear market generally happens every four years, investors shouldn’t panic when it occurs, because the pain typically subsides in less than a year.

It’s important to remember that bear markets don’t last forever, as the market crashes caused by the Covid pandemic, the 2008 global financial crisis or the dot-com bubble showed.

Twelve bear markets have occurred since the S&P 500 index was first established in 1957. The 1990 bear market saw a 19.9% drop. The most recent cycle, which lasted eight months and had a 25% decline, ended in 2022. Yet the S&P 500 has nonetheless made a total return of more than 65,000% since 1957, or an average of more than 10% a year, despite these frequent losses. 

More importantly, bull markets follow bear markets — and these last three times longer than bear markets on average, with an average gain over the duration of the bull run of 111%.

Interestingly, about 42% of the S&P 500 index’s strongest days in the past 20 years occurred during a bear market. Another third of the market’s best days took place in the first two months of a bull market before it was clear a bull market had begun.  

So the best preparation for uncertainty is to understand that markets do fall at regular intervals, but they always recover, and if you accept that 2024 could be volatile or even be characterised by a significant downturn, you will be less likely to make emotional investment decisions.

Stay focused on your long-term objectives, knowing that markets are unpredictable over the short term and lucrative over the long run. 

* Pask is chief investment officer at PSG Wealth