What can we expect from the markets in the coming months: should investors be taking precautions with their investments or seizing opportunities?
In his investment note dated April 4, Old Mutual Wealth investment strategist Izak Odendaal writes: “While we are still trying to figure out the short- and long-term implications of the ongoing pandemic, we must now also consider how the brutal Russian invasion of Ukraine will change the global economic and political order. The world has faced two profound crises in the space of two years. They will cause far-reaching change, but what exactly? Understanding the present is hard enough. Predicting the future is well nigh impossible.”
He says that one likely consequence will be an increased focus on resilience and security of supply over speed, efficiency and cost. “Anybody running a business will think carefully about where crucial inputs come from, the risks of disruptions and steps needed to prevent disruption,” he says, adding, “governments are hopefully doing the same.”
Odendaal says a big part of the strain on global supply chains remains the extraordinary demand for goods compared with the past. “This is one consequence of the pandemic that is still with us. Demand for goods, particularly by American consumers, is still well above pre-pandemic trends.”
Regarding the Covid-19 pandemic, while China has again resorted to hard lockdowns, “in most other countries it has thankfully become background noise thanks to widespread vaccination, immunity from prior infection, better treatment options, less severe strains and frankly, people simply wanting to get on with their lives. Whether we are really at the end of the pandemic remains to be seen, but there is reason to be optimistic.”
There is far more angst about the war in Ukraine, with no immediate end in sight. However, Odendaal says the market reaction – with equities up since the first days of the invasion – “seems to suggest that investors believe the worst-case scenarios are less likely”.
But there’s another important shift underway, Odendaal notes. “Central banks, led by the US Federal Reserve, have turned hawkish, meaning they want to act to tame high inflation. Faced with historically high inflation and historically low unemployment rates, central banks are set to continue tightening policy despite the increasingly uncertain growth outlook. For most of the past 14 years, central banks, particularly the Fed, had been seen as investors’ friends. This was particularly true two years ago when they unleashed unimagined stimulus in response to the Covid shock. No more. What lies ahead will increasingly be a trade-off between sustaining growth and lowering inflation. All indications are that the Fed and company will now focus on the latter.”
In a recent article “It looks like 2022 may be another year of turmoil and resilience”, George Herman, chief investment officer at Citadel, echoes Odendaal’s concerns about central bank interventions. “We expect interest rate increases along with a rollback of other monetary stimulus measures, all of which will add to a tighter global monetary environment. This has an impact on asset valuations, growth expectations, foreign exchange rates and volatility as the markets adjust. The risk is that central banks overdo the tightening and therefore stifle economic growth,” he says.
Herman does, though, see positives for investors: “Global growth is slowing down somewhat, and consumption spending is under pressure from higher energy costs. However, unemployment around the world is at very low levels, which is good news for longer-term global economic recovery. South Africa is the outlier in this regard, with its record high unemployment rates, but the local economy is boosted by low interest rates and record high commodity prices. Globally, new trading relationships are being formed as supply chains are re-organised, creating new opportunities.”
Odendaal also sees opportunities, emphasising that diversification is key. “The world faced major shocks in the past two years and is undergoing economic and political changes that we don’t yet fully comprehend. Yet investment returns were quite good. Investors who ignored the noise and stuck to their strategy would have done well. It is easy to get carried away with the bad news of the moment, but with change there are always investment opportunities. This does not mean blindly extrapolating trends, since what worked in the past might not work as well in the future. But being appropriately diversified, keeping an eye on valuations and being patient will go a long way to achieving the desired outcome,” he says.