By Martin Hesse
“We’re moving from abundance to scarcity, from greed to need.” That statement by Ninety One portfolio manager Clyde Rossouw neatly sums up the sentiment of investment experts at the Investment Forum held recently in Cape Town and Johannesburg. A strong message for investors and financial advisers was this: the days of easy money are over, be prepared for a bumpy ride, but remember that, for savvy investors, times of crisis are times of opportunity.
The Investment Forum, hosted annually by The Collaborative Exchange, and back in “live” format this year after two years of Covid, gathers the best minds in the industry. And while topics ranged from crypto to artificial intelligence, the meat of the conference was in how investment professionals are positioning their portfolios under the current adverse market conditions.
Stanlib economist Kevin Lings said in his opening presentation that at the end of last year, the global economy was the biggest it had ever been, having bounced back from the Covid meltdown in 2020. But things have changed dramatically since then. Most notably inflation, which was kept to a minimum for so long, has reared its ugly head.
While underlying causes differ from country to country, in the United States rising inflation is being driven by easy money – years of extremely low interest rates and quantitative easing, and welfare cheques dished out to households to see them through the pandemic. “People were paid to go shopping … and gambling,” Lings said.
This has led to an overheated US economy, where, because jobs are so easy to come by, workers are demanding higher pay, which in turn is driving up prices. Oil supply constraints caused by the Ukrainian war are affecting fuel prices, contributing to the inflation problem.
Lings said that, despite employing 400 PhD graduates, the US Federal Reserve had “made a mistake”. It had waited too long to raise interest rates and was now playing catch-up. The question facing investors was whether the Fed’s sudden sharp interest rate hikes would push the world into a recession or whether we’ll experience a “soft landing”.
Recession or not, we shouldn’t expect the markets to be stable any time soon. Lings believes the markets have not fully priced in what may be significant drops in company earnings in coming months.
Value over growth
The companies underpinning the strong performance of the US stock market have been the so-called “growth” stocks – the big tech companies such as Amazon and Tesla, which grew rapidly during the pandemic, but which became massively overpriced.
It appears their glory days are over. Ninety One’s Rossouw said the liquidity in the markets had favoured these “greed” businesses (in other words, companies supplying what are, essentially, luxuries), whereas there had been mediocre returns from “need” businesses in the US, such as mining and oil companies.
Rossouw said the markets had seen a shift from “growth” to “value” – in other words, the share prices of the big tech companies are likely to revert to more realistic levels, while there are bargains to be had in companies that have been undervalued. He said the markets will not go back to chasing growth because the cost of capital had changed.
Rossouw maintained that investment style should not be a binary choice between growth and value. At the heart of investment decisions should be the quality of the company you’re investing in.
In another presentation, Simon Adler, fund manager at Schroders in London, made a strong case for value investing – buying cheap shares. In the last decade, because of the easy money flooding the markets since the 2008 global financial crisis, cheap shares have been hard to find, and value as an investment style has underperformed. But over the long term, value has delivered remarkable returns. A sum of $10 000 invested in a value portfolio in 1926 would be worth over $1 billion today. This against $100 million invested in a growth portfolio. Even over rolling five-year periods, value outperformed growth 84% of the time since 1926, Adler said.
Karl Leinberger, the chief investment officer at Coronation, said active investment (as opposed to passive or rules-based investing) was a necessity in what he called “an era of dislocation”. He said we are facing a legitimate crisis: the era of free money is over, 2022 has been the worst year for government bonds since the 1800s, governments are burdened with unprecedented amounts of debt, and the Ukraine war has “ended the global peace dividend”.
But in crisis there is opportunity. He cited the last four financial crises:
- 1998 Russia/emerging markets crisis: the FTSE/JSE All Share Index lost 43%, but 15 months later was up 105%.
- 2002/2 tech collapse: the S&P 500 Index lost 36% but three years later was up 90%.
- 2008 global financial crisis: the S&P 500 lost 57% but three years later was up 109%.
- 2020 Covid crisis: the S&P 500 lost 34% but a year later was up 87%.
Leinberger said it was hard to be positive in a crisis because the human brain is hard-wired to survive threats, not to take advantage of them. “Our time horizon shrinks to the immediate future and our emotional brain trumps our rational brain, with the result that the more prices fall, the more afraid we become and the less we want to own,” he said.
Leinberger said we anchor off a uniquely prosperous and peaceful period in human history, and it was very plausible that the future would not look like the past. He said that to take advantage of this era of dislocation, a rules-based approach to investing would not work, because it implicitly assumes the future will look like the past. He said the following three investment principles should still hold:
- Think long-term (beyond the next two years);
- Underpin your long-term views with deep research into the companies you’re interested in; and
- Put pricing before timing.