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Now is the time for patience and resilience

Aug 3, 2022 | General, Market & The Economy | 0 comments

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The last three years have seen a relentless news cycle of surprises and shocks, but we should remember that just as modern medicine has become much more effective at dealing with pandemics (the likes of which the world saw in the early 1900s with worldwide flu outbreaks), modern financial systems are better at dealing with problems.

In 1929 a sudden sell-off of equities caused the Wall Street crash that subdued global growth for more than a decade. Regulators stepped in to prevent similar occurrences on the stock market, but the Federal Reserve (the US version of the South African Reserve Bank) did not print money to grease the wheels of the economy; in fact, it reduced the country’s money supply, which has been blamed for prolonging the depression that followed the Great Crash. People hoarded money instead of spending it, out of fear.

When stock markets in the US again crashed in 2008, the Fed took a very different stance, learning from 1929 and pumping money into the economy to ease the blow. The global recovery from 2008 and subsequent shocks – including Covid-19 – was reduced significantly through this policy of Quantitative Easing.

The flip side of printing more money is that the Fed risked driving an increase in inflation as the availability of more money drove demand. A rising oil price, global supply chain challenges and the war between Russia and the Ukraine have all conspired to accelerate inflation around the world. To put it simply, many businesses predict that prices for their raw materials and inputs will become more expensive, so they raise prices to cover their future costs. This tends to snowball as inflation passes through producers into the broader economy.

Central banks, such as the SARB, have interest rates to use as a weapon against inflation. By raising interest rates, they hope to push more disposable income into debt obligations (such as mortgages) and cool the rate of spending, which drives down demand and ultimately lowers inflation.

The graph below shows that the world has just been through an unprecedented 40 years of low inflation, by historical comparisons:

The lesson here is that we have had it good for many years. Where our parents and ancestors would have had to contend with wars and at least one oil crisis that sent global inflation skyrocketing, we have seldom seen spikes in inflation that affected our lives to any significant extent.

How does this affect your portfolio? You will have noticed that this has been another challenging quarter for equity markets. The reason is that raised interest rates have the deliberate effect of cooling consumer demand, which reduces the turnover that most companies will make. Some investors – particularly those who are very close to retirement or who are extremely sensitive to short-term events – may sell to avoid the downturn they are predicting, causing volatility in share prices.

However, we need to bear in mind that both spikes in inflation and interest rates are temporary and that trying to predict or time changes in trajectory of the market are almost impossible (the most common cause of wealth destruction.)

Through the history of financial markets, it has been proven time and again that equities are the asset class that will produce inflation-beating returns over the long term. What matters, as the old adage goes, is time in the market. Inflation will cool, interest rates will come down, spending will return to normal and equity market returns will shift back above inflation to produce the real returns we need to create wealth.

These are our thoughts:
The ride will be bumpy in the short term, but there is no reason to panic, sell out or shift into other asset classes. We urge you to hold your position, no matter what unfolds over the next few months. You will be rewarded in the end.

As you can see from the table below (showing UK inflation figures) over the last 110 years the world has experienced periods of high inflation that have lasted for 10 years. The table shows real (meaning in excess of inflation) returns from different asset classes you could have invested in at the time.

As the table shows, the best option over the long term, in the four inflationary decades, is to maintain a high proportion of equities (shares) in a portfolio, even if the ride is occasionally bumpy.


It is worth remembering that during the financial planning process we have done with you, the target is to beat inflation (CPI) by a certain amount. Within that framework, there is an assumed strategic asset allocation which has a certain equity portion. This equity amount moves around, as asset managers change their views or react to what they are seeing and anticipating. Now more then ever, is the time for patience and resilience.  In short, asset managers are making changes on your behalf on a daily basis. It is important that you do not capitulate.

Let the asset managers who are running the multi asset type portfolios do this for you.



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