CIARAN RYAN: The year 2021 was nothing short of a roller coaster ride for investors. Turbulent times always make for good opportunities for investors and opportunities for learning. As you look back on the year just past, this is a great time to assess strengths and weaknesses and improve portfolios accordingly. Markets are volatile in nature, so investors need to be ready to alter tactical positions or promptly seize opportunities.
Joining us to discuss the year in retrospect and what we can expect in the coming year is Adriaan Pask, chief investment officer at PSG Wealth. First of all, welcome Adriaan. As 2021 draws to a close, I think most would say it has been nothing short of a roller coaster ride for investors. In your expert opinion, what were the biggest trends that shaped the financial markets over the last year?
ADRIAAN PASK: Hi Ciaran, and thanks for having me. It has definitely been a very volatile type of year. A lot of things took place that were maybe not within investor expectations and naturally that would introduce some volatility in the market. So an interesting year to say the least.
CIARAN RYAN: We were talking about a V-shaped recovery, a K-shaped recovery. What was your reading of those?
ADRIAAN PASK: I think initially when we look at these types of bear-market events, it’s very important to understand whether they are event-driven, like a pandemic, or whether they’re a bit more structural in nature, where an entire financial system is compromised, because obviously for that you need regulations to try and come in and repair things.
In this specific case it’s quite easy to repeat things on the back of just introducing some more capital into the economy with monitoring fiscal stimulus. In that sense, I think the ‘V’ market recovery was to a large extent expected. What we see more recently is that it’s become a little more uneven.
If you look at the year-on-year numbers for GDP growth, they look fantastic across geographies – largely speaking around the globe. But if you look at the more recent quarter-on-quarter numbers, you can see the base effects are starting to filter out and we are beginning to see some red flags here and there, even if just at a slower pace. The growth is definitely starting to subside a little – at least the acceleration behind it is starting to subside a bit.
You saw our numbers came out. Generally, year-on-year growth is still at 3%, which is fine, but we’ve had a contraction of 1.5% for the quarter. That’s similar in trend to what we would see globally; not necessarily negative, but definitely lower quarter-on-quarter growth numbers coming through across the globe.
CIARAN RYAN: If you look at these trends, what other sort of most important learning curves for investors can we take from these events?
ADRIAAN PASK: Well, I think in turbulent times it’s important also to be able to identify opportunities. I think that’s where seasoned investors really come into their own because, when you work in markets on a daily basis you get a better understanding and appreciation for how markets behave over time, and you start to see some of these things as more normal than some retail investors perhaps would.
We did see many fund managers in the industry jump on the opportunity and try to harvest some alpha for clients. Some of the key ones were, for example, in the energy space. We know what happened to the oil price last year – a lot of turbulence in that space. Subsequently energy prices have recovered and companies like Sasol have done quite well out of that.
I think it’s really important to keep that opportunity-seeking mindset intact. Also, I think valuations matter in the end. We’ve seen a lot of poor growth projections come into play and companies sell off on the back of that; then a lot of liquidity comes in, as I’ve mentioned before. Obviously that played havoc with valuations. But I think if you look at the price-to-book values of many of these counters, it does seem like they are unsustainably low. So on that side they have done quite well.
Then some of the basics. I think in terms of lessons often these are good reminders – these volatile periods – that again, the old cliché of maintaining a well-diversified portfolio when things are really tough and uncertain, maintaining portfolios well, is one of the few levers that you can pull to get some comfort. But also to have a disciplined process for how you deal with these types of events is really key. I think those are good reminders for even professional money managers who, as I say, work in markets on a day-to-day basis. So everybody continues to learn, again just highlighting the importance of having discipline in your process and thinking
CIARAN RYAN: If you look to the coming months, what are some of the trends that we can expect to see? I see the IMF is expecting quite good growth next year, but not quite as high as this year. What does that mean for us?
ADRIAAN PASK: I think it continues on that trend – that we’ve now recovered out of that low base. We’ve got a little bit more certainty around vaccine rollout. There’s still a little bit of uncertainty around the new variants, but even that seems not nearly as bad as how markets initially reacted. Markets have a habit of pricing in a worst-case scenario, and then taking it from there.
But for the coming period I think this year was really about inflation. We’ve seen a lot of this in the media, a lot of communication coming out of the research houses, IMF, fund managers and across the media sector. There’s a lot of talk around inflation and I think that’s really a prelude to an interest-rate conversation – and we’ve already seen interest rates move up slowly locally.
We’ll see interest rates move up in the US, probably in Q3 next year. That’s going to be a really big event. We are already talking about tapering and seeing what’s happening there. So I think tapering and interest rates are going to be a huge discussion next year. Then the knock-on effect in my mind is going to be what US markets do – and that speaks not just to equities, but also to the bond market.
Investors have been really spoiled with fantastic returns over a prolonged period of time out of US equities and US bonds, but I think that’s probably going to come to a very abrupt end next year. That would be our thinking.
Maybe lastly, in a similar vein, growth stocks have done really well. Counters priced in a whole lot of growth and looser monetary policy indefinitely. As we see tapering and interest rates pick up, those growth stocks are likely to come under pressure as well. It doesn’t make them bad firms, but you can turn a good company into a bad investment by just investing in something on high valuations when interest rates are about to go up. I think that’s where the markets may be missing a trick at the moment. That’s an area of concern for us.
I think those would be the three key areas for us in the coming months and year.
CIARAN RYAN: Just talk for a second about 2022. Do you believe the investment landscape for South Africa is more attractive as we go into the new year than it was at the end of 2020, when we were really [well into the Covid pandemic]?
ADRIAAN PASK: Yes. I think we are definitely in a better space than we were last year at this time. Last year this time, if you cast your mind back, we were still in a very uncertain space. There was a lot of unhappiness around vaccine rollout in South Africa. Since then we’ve obviously managed to repair a lot of that, get vaccines rolled out and so on – with a lot of development in that space.
So the economy has been opening up. There’s been a lot more clarity. Sentiment is gradually starting to improve; although, if you look at sentiment, the level is still very, very poor. Equity markets have started to price in a bit more – I wouldn’t say optimism, but let’s say less pessimism. If you look at the valuations, they are still quite attractive. So I think we are still in a very good space from an investment perspective. It’s not to say that we are utterly optimistic around the economic prospects, but the valuations seem to be overly negative at this stage.
CIARAN RYAN: Adriaan Pask, chief investment officer at PSG Wealth, we’re going to leave it there. Thank you very much, Adriaan.
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