When you are under water, keep calm and hold on to your life jacket

Went river rafting in the Vaal a couple of years ago. Sore bodies aside, there was certainly a lot of learning. At the start, you declare your swimming skills and are given safety tips — among them is holding on to your life jacket when you fall into the water, as waving your arms allows your life jacket to shoot out of your body.

As we started, there was tranquillity and calm, floating along the river in our rafts with clean, fresh air and birds chirping as we went along. The problem started when we hit turbulent waters and got to the more advanced elements of the exercise. A lot of us participated despite earlier declarations on the various swimming skills. Of course, there was a lot of struggle, with some swimming straight into rocky waterfall areas, which sucked us into the river, while we were hammered by the rocks.

Part of the reason I participated in the advanced activities was that I saw team members I believed to be less proficient at swimming taking part. Afterwards, ironically, some said they participated because they saw less proficient people participating. This highlights the power of herd mentality and group-think.

It is often difficult to make the right decision if everyone is making the wrong decision, even when taking pain in the short term means you will be significantly rewarded in the long term.

With global market volatility, it has become quite easy to write off markets, particularly as there is a lot of negative news feed from high inflation, the Russia-Ukraine crisis, interest rate hikes and fears of a global recession. However, what is important to take note of in the long term is the improving valuations and the fact that markets typically reward investors with doubledigit bull market returns.

Of course, there is concern about what lies further down the river and whether markets will recover.

From our perspective, if history is anything to go by, it is not a matter of whether markets will recover, but when. While we may not know the timing of market recovery, we can certainly try to understand it.

We know that it will be linked to monetary policy and the macroeconomic outlook. We also know that markets move ahead of the economy. As we are closer to the peak of the ratehiking cycle, we can infer that we are also close to the bottom of the market cycle. We can also infer that recession expectations are priced into market prices.

Furthermore, judging by the positive earnings surprises, particularly in the US, it would certainly appear that there is significantly more upside than downside to market movement from current levels.

Being among those in rocky waters, I too struggled. I was reminded to hold on to my life jacket. However, as every second felt like an hour, and as I felt myself go deeper into the river with water rushing up above me, I started to panic — and rightly so. All my senses were telling me to panic, even though my knowledge of physics was telling me I would eventually come up. Being from a conservative African family, I distinctly heard my mother’s reprimanding voice, bowenzani, meaning “what were you doing?!” Just before I lost all hope, I began to feel the life jacket pulling me up.

This is very similar to market drawdowns. It certainly begins to feel like markets will be negative forever, particularly as we are bombarded with negative news feed. But history and our knowledge of markets tell us this is not the case. There is cognitive dissonance between what we know to be true and what we are experiencing. What is essential is to separate the noise from the trend.

However, not all companies will recover and even those that do will not recover at the same pace and to the same extent. This is the importance of investment management professionals: first to maintain a sufficiently diversified portfolio to reduce risk and minimise drawdowns; second to adequately position our clients’ investment portfolios to positively participate as and when markets rally. Diversification and market behaviour become our life jacket, while our skills are there to minimise swimming in the rocky waterfall where we expect no reward.

We should be constantly reminded of our initial declarations and our long-term investment objectives, and avoid herd behaviour. If it is long-term, above-inflation wealth creation, then equity markets will provide the bulk, but this comes at the cost of short-term volatility. We have certainly seen volatility rising in recent times.

Within these conditions, we have continued to find attractive investment opportunities, even in the tech sector, which has fallen out of favour. This includes media streaming counter Netflix, which, although experiencing increased competition, remains a market leader. It is ahead of the curve with respect to stabilising its content and platform spend, has huge opportunities to monetise ad content and eliminate multiple users on single subscriptions with a new tiered price structure, and is currently trading at attractive valuations.

WITH GLOBAL MARKET VOLATILITY, IT HAS BECOME QUITE EASY TO WRITE OFF MARKETS