Victoria Reuvers, Managing Director at Morningstar Investment Management South Africa, looks at how financial markets performed in 2021.
As a runner, the change in seasons gives me time to reflect. Autumn is my favourite season, and always reminds me that change is the only constant. Winter reminds me of all that’s lost, the hardship of life for so many, and the brevity of daylight hours. When we move to spring and on to summer, I rejoice in the new life, new colours, and new daylight hours that come with this season, and am reminded of how the cycle continues.
Investing also goes in cycles
If we reflect on the past year of investing, it too has experienced its seasons and cycles.
At face value, it appears as though markets have performed well, however, broadly speaking there have been some bad landmines that simply could not have been avoided by all investors.
2021 was also by no means a dull year – global bonds bottomed out, there was the Evergrande debacle, and Chinese tech stocks slumped, with the effects felt in all emerging markets.
SA equities are making a comeback
After a seven-year drought of returns for domestic equities, the past 18 months have seen a strong rebound in South African equities, with broad-based returns across the sectors.
While 2020 saw resource shares (mainly platinum and diversified miners) performing well, 2021 has seen a rotation into more unloved areas of the market. The strongest performing areas in 2021 were what we would term “SA Inc.” shares: banks, retailers and select industrial shares.
What has caught many investors by surprise this year, has been the sharp fall in the Naspers and Prosus share price.
Market darling Naspers, combined with Prosus (its European-listed counterpart) account for almost 20% of the All-Share Index. A combination of concerns regarding the Chinese government’s interference in their market with regards to the new regulation for select tech companies, alongside the disappointment surrounding the Naspers Prosus share swap and/or company restructure, has provided strong headwinds for these shares.
Fixed income not so ‘fixed’ anymore
Fixed-income managers have not had an easy year, with 2021 not being the year for income assets. What had appeared to be a stable (and dare I say “boring” asset class) was no more, as 2021 saw fixed-income assets experience a lot of volatility.
SA government bonds bamboozled
SA government bonds remain perplexing. We are seeing good value in this asset class, with yields of around 9.5%. This is almost 5 percentage points ahead of cash and 4 percentage points ahead of inflation, which is unheard of in global markets.
Yet despite this attractive yield, foreigners have not been investing in our bond market to the levels they have previously. As a result, this asset class is generating a decent yield for investors but has been subject to market volatility this year due to the lack of foreign support.
Cash is still out in the cold
We see little room for holding cash in portfolios. Not only is the nominal yield low (around 4%), it is in fact offering a negative real yield, given that inflation is close to 5%.
Global markets continue to outperform
While value shares and unloved sectors (such as energy and UK equities) have certainly rallied and have been solid contributors to portfolio performance, the tech stocks in the US have reached stratospheric levels (both in terms of performance and in price).
In our opinion, this sector is starting to carry a striking resemblance to the tech bubble of the late 90s.
Firstly, the market is trading at extreme valuations and is experiencing new IPOs at a rate last seen in the late 1990s. As they say: if it walks like a duck and talks like a duck…
We would prefer to be cautious at this point. We remain materially underweight US large-cap tech shares.
Despite emerging markets selling off sharply on the back of the Chinese government’s interference in capital markets and the restrictions and regulations placed on their tech companies, we are seeing good pockets of opportunity in emerging markets.
While SA fixed-income managers had a tough time in 2021, it was even worse for global fixed-income managers.
Global bonds were one of the worst performers in 2021. With starting yields at low levels and bond yields rising throughout the year, this has led to bondholders experiencing meaningful capital losses.
Looking forward to 2022
In the wise words of Warren Buffett: “Be fearful when others are greedy and greedy when others are fearful.”
There is much exuberance, easy money and excitement in certain areas of the market. This level of optimism and crowding makes us “fearful”.
There will be good-news stories for companies and sectors that will be extrapolated into the future with investors prepared to pay extreme prices just to own these golden companies.
Remember that “Price is what you pay, but value is what you get” – another valuable lesson shared by Mr. Buffett. Now is the time to be vigilant and to ensure that you are getting value for what you buy.
You may hear some commentators saying that markets are expensive and now is not the time to be invested, while others say that things will just keep going up. To this we would say: there is never a “right time” to invest. The key is just to be invested and to remain invested.
This post was based on a press release issued on behalf of Morningstar Investment Management South Africa.