Turnaround possible
SITUATION SIMILAR TO THE EARLY ’8OS AND CAN BE REVERSED
Look at the fundamentals and invest for long term.
The Glacier Investment Summit started on an upbeat note on Thursday with the first presentation by Madalet Sessions, portfolio manager at Denker Capital, who stopped just short of promising investors stellar returns over the next few years.
“Circumstances are similar to the 1980s when the Dow Jones hit a low on 12 August 1982. It was trading on a low price-earnings ratio just shy of eight times. Since then, the US market has increased 47-fold. Imagine the enormous riches and wealth created in those 40 years,” said Sessions.
“Exceptional times define exceptional starting points.”
Sessions believes the world is in a similar situation today, presenting figures that show remarkable similarity to 1982 – when world markets tumbled as the sharp rise in global inflation caused central banks to increase interest rates to reverse the decades of low interest rates.
The era of declining interest rates started in the early 1980s after inflation and interest rates hit a high in 1982. The 10 or 15 years before that saw increasing inflation and interest rates, similar to the situation today.
“Inflation in the US increased from below 4% in the late 1960s to 12% in the early 1980s. Markets tumbled. High inflation is not good for asset markets,” said Sessions.
A look at the recent behaviour of stock markets around the world shows investors are probably facing the same situation.
Inflation has spiked higher worldwide, so much so that the world breathed in relief when the US announced on Wednesday that inflation declined slightly – to “only” 8.5%.
US markets spiked immediately as investors moderated their negative outlook, from expecting very high interest rates and low economic growth, to a slightly better view that inflation will recede more quickly before contractionary economic policies curb growth too much.
“Remember, investor returns are simply what companies can earn,” said Sessions, explaining that companies can only deliver good returns if the economic environment allows company profits to grow.
The performance of stock markets around the world indicates that investors expect a difficult economic environment, largely due to high interest rates curbing growth, as well as the lingering effects of the Covid lockdowns.
Sessions quoted interesting statistics to show that things can turn around quickly. “It was unprecedented that SA markets performed much better than world markets in the first quarter of 2022,” she said.
“In rand terms, the JSE returned 6.7%. The S&P500 declined by 13.1%; the MSCI World index by 13.3%; and the MSCI Emerging Markets index by 15.4%.”
In contrast, the JSE gave back a lot of its gains. “SA did not have enough momentum on its own to weather the storm,” said Sessions.
On balance, Sessions presented a good case for embracing the opportunities the current uncertainty in markets presents.