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Investors’ dilemma – TINA

TINA: There is no alternative.

Tina was by no means the most popular name for newborn babies lately, and this is not a reference to Tina Turner either – although, she could have sung “equities, you are simply the best, better than all the rest”.

The popular expression on Wall Street, TINA – “There Is No Alternative”, is a description of the lack of investment opportunities that have presented themselves over the past few years. In simple language, the TINA effect describes the phenomenon of investments in other asset classes appearing so unattractive that investors still prefer to buy stocks – no matter what valuation – thus pushing share prices upwards. 

Calendar 2020 will undoubtedly go down in the historical records of financial markets as a year to remember. The rapid sell-off of stocks worldwide was followed by an exceptionally quick recovery to new highs, all within a few months. Investors exchanged panic for optimism.

Much of this optimism was due to the steady rise in technology stock prices driven by business models that largely benefit from the effect of the Covid-19 pandemic.

Excessive stimulus and liquidity

A further contributor to this recovery is the enormous amount of stimulus derived from aid packages that arose during the Covid-19 crisis, as well as the reductions in lending rates to record-low levels. In addition, the financial markets are also counting on the roll-out of vaccines to curb the spread of Covid-19.

It has been more than a decade since the Global Financial Crisis and, in the intervening years, excessive liquidity and abnormally low interest rates have meant that investors have been forced to show a preference for buying shares instead. Interest rates in the US have been abnormally low for decades, while in certain European countries the yield on 10-year government bonds is in negative territory. Why would you lend your money to the German government if you’re going to get back a smaller amount after 10 years?

Combined, these factors have resulted in the S&P 500 Index growing by 13% per annum in US dollar terms. It outperformed other assets including cash, property and government bonds. In an environment of low inflation and limited money market options, the average investor is quite happy with a 7% annual return in US dollars, so a 13% annual return appears extravagant. The warnings are being sounded, though, about inflationary consequences that could lead to the normalisation of interest rates – which, in turn, will drive up the cost of debt and suppress company profits. 

2020 reminds us that we should stick to our plan

In March 2020, South Africa’s money market rates looked all too tempting at 7%, against a backdrop of world equity markets collapsing. However, investors who deviated from their long-term plans at that point will be disappointed today. Over the past year, the JSE All Share Index rose 22.3% while the MSCI World Index gained 14.7% in rand terms, as opposed to the 4.7% return achieved in the money market.

Source: Bloomberg

Strategies to help you navigate

Review your investment plan: Any experienced yacht captain will always advise you to work on the sails when the sea is calm. You don’t want to be panicked into making changes, as some investors did in March 2020, when the storm was at its worst. The markets have bounced back, and some stability has been restored. This presents a good opportunity to talk to your wealth advisor about reviewing your plan and then making changes where necessary.

Maintain a healthy emergency fund: If you were forced to dip into your emergency fund during 2020, now would be a good time to replenish it from your investments. How big that fund needs to be will depend on your individual circumstances. A good rule of thumb would be about six months’ expenses. I believe, for many people, such a provision would have been very valuable during the lockdown when many people saw their incomes being halved or falling away altogether.

Diversify risk assets such as equities: Try to take advantage of opportunities that do not involve the more expensive US stocks. The PSG Wealth Global Flexible Fund of Funds is well-positioned and composed of a basket of top fund managers. The multi-manager structure of the fund offers diversification, lowering the risks associated with a single-manager fund.

As Jeremy Grantham warns, if assets are praised for their perfection, it doesn’t take much to bring about disappointment. Thus, while there may not be many alternatives to risky stocks, it certainly helps to adjust your expectations about returns.

ADVISOR PROFILE

Marzel Swart

PSG Wealth Pretoria-East

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