IOL Money - January 2022 - Investment Outlook for 2022

IOL

MONEY JANUARY 2022

INVESTMENT OUTLOOK FOR 2022

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CONTENTS FEATURES 5 Business sectors to watch in 2022

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Looking into a crystal ball – the South African economy in 2022

2022: Outlook for the local investment market Global economic outlook for 2022

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Rands and Sense with Kapil Joshi

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Fact File: Inflation and interest rates

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REGULARS

Planning Perspectives with Palesa Tlholoe Important contacts and links

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FROM THE EDITOR

With a good perspective on history, we can have a better understanding of the past and present, and thus a clear vision of the future.

– CARLOS SLIM HELU Mexican business magnate

CONTACT US PUBLISHER Vasantha Angamuthu vasantha@africannewsagency.com MONEY EDITOR Martin Hesse martin.hesse@inl.co.za DESIGN Mallory Munien mallory.munien@inl.co.za PRODUCTION Renata Ford renata.ford@inl.co.za BUSINESS DEVELOPMENT Keshni Odayan keshni.odayan@inl.co.za SALES Charl Reineke charl@africannewsagency.com ENQUIRIES info@anapublishing.com

WILL we or won't we? Will we return to life as it was before two years of disruption, devastation and death caused by an inanimate but replicable ball of protein visible only under the most powerful of microscopes?

Or will the pandemic have permanently altered our day-to-day living patterns that everyone took for granted? Going to the mall, going to the movies, attending sports events and rock concerts where people stand cheek by jowl. Standing in queues in the bank. Commuting daily to and from an office in the centre of town. Attending work-related conferences … in the flesh. Amassing air miles on business trips.

I believe 2022 will be the year we start to get answers to these questions.

Already we have some idea of what has been transitory and what will be entrenched.

And it won’t be a question of either-or. Yes, sure we will again do all those things listed above (except standing in queues in the bank ‒ if my bank can’t comprehensively attend to my banking needs digitally, then I will switch banks to one that can).

But the extent to which we do them will have changed, as will the spirit in which we do them. That’s because the virus has irrevocably changed the perception of the world for all that have survived it. In losing loved ones and losing our freedoms (even just temporarily), we are all a little bit sadder, a little bit more conscious of our vulnerability, and a little bit wiser.

Martin Hesse

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INDUSTRIES TO WATCH IN 2022

As we enter the third (and hopefully final) year of the pandemic, businesses will rise and fall depending on the extent to which the world returns to life as it was before Covid-19 and the extent to which it has changed life fundamentally.

BY MARTIN HESSE

1. PHARMACEUTICALS The pharmaceutical industry is making billions from the vaccines it has developed to combat Covid-19. As the virus has mutated, these vaccines have lost efficacy, yet have continued to protect against severe disease and death. Will we need to continue to be protected by vaccinations and boosters if the virus, as the Omicron variant is indicating, evolves to become as mild as a common cold? Be wary of the industry overplaying the need for vaccines in this scenario, when most people will get protection from natural immunity. On the positive side, the strides made in developing the vaccines have opened the way for vaccines against diseases we have not yet conquered.

2. ENERGY

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The August 2021 report on climate change by the Intergovernmental Panel on Climate Change and the ensuing COP26 conference in Scotland in November have re-emphasised the need for action against global warming. This heightened awareness is driving investment away from fossil-fuel energy sources and into more environmentally-friendly, renewable alternatives such as solar and wind power. Battery technology is vital to the successful transition away from carbon, because these alternatives need reliable, large-scale electricity storage to be commercially viable. And we may be close to a break-through in the quest for nuclear fusion.

3. TOURISM

As the world emerges from the pandemic, the travel and hospitality sectors will recover from the extreme disruption of their business. However the recovery will be slow – people will be cautious to start travelling again, especially on long-haul flights. And will they want to spend their holidays on crowded ocean liners or in busy 300-room hotels? New patterns of travel are likely to become entrenched, with people opting to take their holidays closer to home and at more secluded destinations. Savvy tour operators, travel agents, hoteliers and restaurateurs will exploit the opportunities offered by these trends.

4. TECH

Advances made over the past decade will continue to shape our world and disrupt traditional ways of doing things. In finance, blockchain-based applications will carry on eliminating middle-men such as banks and payment clearance houses, giving the consumer greater control over transactions. The term “DeFi” (decentralised finance) will gain popularity as the trend progresses.

Non-fungible tokens (NFTs) – blockchain-based, nonreplicable digital creations – are likely to become more accepted an alternative asset class. And the Metaverse?

Don’t expect too much in 2022, but there’ll be much work done behind the scenes in laying the foundations for this alternative reality.

5. PROPERTY

Commercial property has suffered during the pandemic while residential property has boomed. Expect this trend to accelerate if employers remain comfortable with staff working from home. Wall Street Journal columnist Peggy Noonan says the pandemic brought about “the collapse of the commuter model … the owners of great businesses found how much can be done remotely. They hadn’t known that! People think it will all snap back when the pandemic is fully over but no, a human habit broke; a new way of operating has begun.” Will city business districts become redundant? Many people who are able to work from home are moving out of cities.

Expect a rise in property prices in attractive rural areas.

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LOOKING INTO THE CRYSTAL BALL – THE SOUTH AFRICAN ECONOMY IN 2022 Well-known economist Raymond Parsons presents a picture of how the economy will perform this year, given various global and local trends and influencing factors.

WHAT 2022 has in store for us is highly uncertain. As a small, open economy, South Africa is vulnerable to volatility both at a global level and closer to home.

Domestically, the new year represents another inflection point for the economy. After a likely 5% rebound in GDP growth in 2021, the growth forecasts for 2022 and beyond are conservative – and too low given SA’s immense socioeconomic challenges.

The year 2021 was another tough year for the country. Low points include the widespread civil unrest in July, extended periods of Eskom load shedding, intermittent Covid-related lockdowns, the announcement of record-high unemployment figures, the emergence of Omicron and the imposition of various international travel bans on SA. What is the global economic picture telling us?

The rapid spread of Omicron across the world is a grim reality, bringing with it additional economic risks and disruptions.

In a world that has grown weary of Covid-related restrictions, new lockdown measures are nevertheless being introduced in various countries. Two of the most obvious economic risks in 2022 are now lower global growth and higher inflation (off an already-high base).

Apart from Omicron and its accompanying challenges, two additional reasons for emerging markets like SA to feel vulnerable are the gradual tightening of US monetary policy and a sharp slowdown in the Chinese economy.

The global commodity boom seems to be over for now (except for some key SA agricultural exports to China). While the US’s gradual unwinding of its quantitative easing monetary policy may, for various reasons, be less of a shock to emerging economies now than it was in 2013, most of these economies could still be left with unenviable

choices. A hawkish US monetary policy and a strong dollar usually go hand in hand with a declining appetite for risk in global investment markets. Recent developments have given greater prominence to global inflation trends and the interest rate outlook. Interest rates have been raised in several countries.

As the world moves into the third year of the pandemic, it is not necessarily all gloom and doom.

Adaptive behaviour on the part of people, firms and governments – as well as more vigorous vaccination drives – can help to alter the future trajectory of the contagion. There

7 are also signs that supply bottlenecks may be easing while manufacturing hubs are beginning to show quicker delivery times. Even in the face of some predicted worst-case scenarios, the world economy is not expected to experience another massive contraction in GDP growth, as was witnessed at the start of the pandemic in 2020.

The SA economy in 2022 Although real economic activity in SA in 2021 as a whole is likely to deliver a growth rate of about (or just under) 5%, there was nevertheless a setback in the third quarter when GDP growth declined by a higher-thanexpected -1.5%. This contraction, if seen together with the record unemployment figures, confirms the serious damage done to the economy by factors such as the large-scale civil unrest and persistent Eskom load shedding.

The Covid-19 pandemic has, also over time, exacted its economic toll on businesses, especially SMEs. The flat performance of private and public-sector investment remains of special concern as it is upon this that future growth now mainly rests.

Some key sectors of the economy, such as manufacturing, have been less resilient than others. Fortunately, the ongoing strong performance of the agricultural sector is a major bright spot on SA’s economic horizon.

Growth expectations for SA in 2022 have ranged from a pessimistic 1.4% to a more optimistic 2%. The Medium-Term Budget Policy Statement in November projected an average growth rate of 1.7% over the next three years.

Most of these estimates are barely above the population growth rate and are therefore inadequate for a developing economy like SA. Policies in 2022 must be geared towards doing better in the face of the socioeconomic red flags raised by these forecasts. On the inflation front, Consumer Price Index inflation has risen over the past few months, driven

mainly by the recent surge in fuel and raw material costs and higher food and electricity tariffs.

In November, the SARB’s Monetary Policy Committee (MPC) raised interest rates by 25 basis points (0.25 percentage points) because of concerns about the upside risks to inflation. This came after a prolonged period of relatively low-interest rates.

The MPC also signalled the likelihood of a collective hike of 100 basis points (one percentage point) by the end of 2022. Borrowing costs for businesses and consumers are, therefore, destined to rise.

Robeco strategist Peter van der Welle offers a useful distinction between “good, bad and ugly inflation”. “Good inflation,” he says, is the non-accelerating type that coincides with an economy that is operating in equilibrium. “Bad inflation” is what he currently sees reflected in global supply-chain bottlenecks. “Ugly inflation”, which is what must worry central bankers the most, produces a wage-price spiral.

This framework is relevant in the SA context.

The IMF includes SA in the group of emerging economies whose inflationary expectations showed signs of being better anchored. The SARB’s December 2021 Quarterly Bulletin points out that “in an environment of subdued domestic demand, core inflation remained relatively well-contained ... despite accelerating from April 2021”.

Misdiagnosing the type of domestic inflation prevailing in SA and using much higher interest rates to deal with it could raise the spectre of “stagflation” (low growth combined with high inflation). If this happens, it will give SA the worst of both worlds.

Higher borrowing costs may not curb cost inflation and instead depress output and employment.

The way ahead for SA in 2022 Against this constantly changing global and domestic backdrop,

the economic and political forces dominating the SA landscape this year have converged into one overriding priority for the country in the immediate future – to strengthen service delivery in its broadest sense, at multiple levels.

SA has a clear and urgent choice to make – either promote real growth, hasten transformation, and keep government affordable and the tax burden reasonable, or tolerate persistent delivery failures, which will lead to rising costs, a further decline in service quality and greater financing demands.

A major driver of the investment needed to induce higher levels of growth and job creation is policy certainty. Reducing uncertainty requires the creation of a credible macroeconomic environment that provides a stable outlook for investors, consumers and workers.

Former Finance Minister Tito Mboweni recently reiterated that policy certainty is one of the fundamental structural reforms needed in SA as it will have a marked impact on investors’ decisions.

It is, therefore, wrong to simply accept, and implicitly condemn, the anticipated low growth rates for SA. SA must vigorously test the limits of its economic potential by implementing obvious and pressing economic reforms. But this will not happen automatically. The economy is not on cruise control.

If we want to see tailwinds prevail over headwinds in SA in 2022, then the promised economic reforms must be tackled with a new sense of urgency. Procrastination and drift are the enemies of delivery and momentum.

Raymond Parsons is a professor at the NWU School of Business & Governance and a special policy advisor to Business Unity South Africa. This is an edited version of his original article, which appeared on IOL and can be accessed here.

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2022: OUTLOOK FOR THE LOCAL INVESTMENT MARKET While always dependent on how the US and other developed-world economies fare, the South African financial market seems to be in a better position than some of its emerging-market peers for growth this year, writes MARTIN HESSE

INVESTORS in local shares have had their best year in almost a decade. The FTSE/JSE All-Share Index (Alsi) rose 24% in 2021, it’s best performance since 2012. The total-return index (the Alsi with distributions reinvested) rewarded investors with a stunning 29.2% return on their money. On the other hand, investors in cash saw their returns shrink as inflation reared its head. Can equity investors expect another bumper year in 2022? And what about the other asset classes?

Delving into what financial experts are thinking, first a broader view of prospects for emerging markets.

David Rees, senior emerging markets economist at London-based global investment house Schroders, says the threat of new Coronavirus

variants presents an ongoing risk, as the uncertainty around Omicron illustrates, and this could change the outlook quite dramatically. He says that while improved Covid outcomes should benefit services-based economies, especially those that rely heavily on tourism, there is no getting away from the fact that emergingmarket economic growth will be slower in 2022.

“Many of the economies have already recovered to pre-pandemic levels, and this naturally makes it harder to sustain above-trend rates of growth,” Rees says. But he also cites some fundamental reasons for expected slower growth. These include a slowdown in global trade; a weaker outlook for China, which could lead to softer demand for

commodities supplied by emergingmarket economies such as ours; tighter monetary and fiscal policies by governments intent to repair the damage done to their budgets by the pandemic, and higher inflation.

Business Report recently reported that the International Monetary Fund (IMF) warned emerging economies to prepare for US interest rate hikes, as the Omicron variant had raised additional concerns about inflation.

The US inflation rate is expected to come in at 7% for December, a fourdecade high, and the markets are already betting on the US Federal Reserve raising rates earlier rather than later.

IMF senior economists said the impact of the US tightening its monetary policy could be more

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“Faster rate increases in response could rattle financial markets and tighten financial conditions globally,” said the IMF. “These developments could come with a slowing of US demand and trade and might lead to capital outflows and currency depreciation in emerging markets.”

EQUITIES Analysts generally believe that, bar unforeseen catastrophes, the Alsi should continue to perform well in 2022, although not at the levels of 2021. Bloomberg reports that the JSE is set for more gains “on the back of a weakening rand, attractive valuations and supportive monetary policy”.

“We have a positive outlook for South African equities in 2022, expecting double-digit returns,” Jonathan Kennedy-Good, a Johannesburg-based analyst at JPMorgan Chase, told Bloomberg recently. “Above-trend GDP growth and still low rates in South Africa should help equity returns. A weaker rand should boost offshore earnings over domestics.”

Even after last year’s gains, JSE share valuations remain well below those of emerging-market peers, making them very attractive for investors. Tim Acker, a portfolio manager at Allan Gray told Bloomberg: “We are actually finding quite a lot of attractive opportunities, which makes us optimistic about future returns.”

Hannes van den Berg, co-head of South African equity and multiasset investments at Ninety One, told Bloomberg that he sees the resources sector as a big beneficiary of global economic growth, while domestic industrials and retailers may get a boost from South Africa’s recovery.

Continued gains, however, could come with more volatility, he warned.

“Expect more volatility because of the interest rate hiking cycle globally,” Van den Berg said. “Don’t expect the same kind of records and returns as we’ve seen over the last 18 months.”

BONDS Sanisha Packirisamy, economist at Momentum, and Herman van Papendorp, head of investment research and asset allocation at Momentum Investments, say that while inflation has eroded the yields of bonds in developed countries, the high real (after-inflation) yields of South African bonds “are in stark contrast to those in the developed world and even among emergingmarket peers”.

For example, local 10-year government bonds are yielding 4.9% after inflation, as against -3.5% in the UK, 1.2% in Mexico and 0.4% in Brazil.

“It stands to reason that these high real bond yields already discount a high fiscal and country risk premium.

Not only are South African real bond yields currently attractive versus developed and emerging-market yields, but they are also high against historical averages,” Packirisamy and Van Papendorp say.

CASH With inflation at 5.5% in November and the repo rate at a low 3.5% for most of 2021, cash investments provided meagre, below-inflation returns for investors (money-market fund yields hovered around 4% at the end of the 3rd quarter). After the November rate hike to 3.75% by the South Africa Reserve Bank, forward-looking cash yields rose to above zero (in other words, returns are expected to rise slightly above the inflation rate). However, the aggressive rate cuts early in the pandemic “have made cash the most expensive asset class since 2020,” Packirisamy and Van Papendorp say.

In its statement accompanying the repo rate hike in November, the SARB projected a full 100-basis-point (one percentage point) rise in the rate by the end of 2022 – 25 basis points each quarter.

However, inflation is also likely to be up by then, though many analysts still expect it to level out by the middle of the year.

PROPERTY Listed property performed exceptionally well in 2021 (the SA Listed Property Index was up 36.9%), but that was largely a bounce-back from a long period of severe underperformance. Packirisamy and Van Papendorp say fundamentals remain negative, with “rising vacancies, falling escalations, negative rental reversions with a focus on tenant retention and sharp rises in operating costs the order of the day. The negative structural factors of workfrom-home and desk sharing also impact the office sub-sector. In the retail sector, too-high rental costs to sales and e-commerce are additional threats, while the industrial sector faces weak capacity utilisation rates and electricity supply issues.

“Our expectation is that listed property values will have to decline by 10% to 15% to account for these negative fundamentals. However, we think a large part of the negative fundamental backdrop has already been discounted,” Packirisamy and Van Papendorp say.

On the residential property front, regional director and chief executive of Re/Max of Southern Africa, Adrian Goslett, says it is difficult to predict with any kind of certainty what lies ahead.

“When we first entered a hard lockdown back in March 2020, we predicted that the property market, along with everything else, was likely to crash. But, counter to what everyone predicted, the real estate market bounced back and performed better than pre-pandemic years,” he says. The biggest threat posed to the housing market next year, he says, is the very real possibility of an ongoing interest rate hiking cycle.

However, Carl Coetzee, chief executive of BetterBond, says that with the Reserve Bank forecasting only marginal rate increases each quarter for the next three years, “there is still time to make the most of the favourable lending environment that helped keep the property market buoyant during the pandemic.”

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GLOBAL ECONOMIC OUTLOOK FOR 2022 Economist Keith Wade gives his views on the outlook for the global economy in 2022 when growth is expected to cool after a very strong 2021.

THE emergence of the Omicron Covid variant has reminded us of the uncertainties which remain around the global pandemic.

Despite these, we expect 2022 to be another good year for growth as the global economy continues its recovery. We do, however, see growth cooling following an exceptionally strong 2021, as the massive support offered by governments and central banks during the pandemic’s initial stages begins to fade.

Inflation should moderate, but policymakers and investors face a difficult period in the interim. Our forecast is that 2021 global GDP growth will be 5.6%, to be followed by 4.0% growth in 2022. We see global inflation at 3.4% for 2021 and rising to 3.8% in 2022.

The economic recovery following the pandemic has differed from economic recoveries of the past.

This has thrown up unanticipated problems in supply chains which have been beset by bottlenecks.

We’ve also seen issues with labour markets, where companies have struggled with worker shortages.

Bottlenecks and shortages have pushed inflation and wage rates higher than expected.

The unbalanced nature of the recovery can be seen in real (afterinflation) retail sales in the US, which are now more than 10% above their pre-pandemic levels. In contrast, real service sector spending remains some 2% short of where it was before Covid-19.

The impact of bottlenecks is apparent in the recent loss of momentum in retail sales volumes.

This loss primarily reflects the impact of higher inflation as retailers faced with restricted supply have passed on their own cost increases. In nominal terms, sales have continued to forge ahead and are some 20% above pre-pandemic levels.

Higher inflation reflects restricted supply and strong demand. While central banks cannot affect the former (speed the delivery of cargo, say, or, in the case of renewable energy, make the wind blow harder), they can restore balance given they have the tools to address the strength of demand.

GOVERNMENT SUPPORT TO FADE We expect the withdrawal of emergency levels of support by central banks and governments to play an important role in shaping

economic activity in 2022. The massive fiscal stimulus policies (government spending and taxation policies designed to support economies over the short term) in response to the pandemic are already winding down in the US and UK. Although government spending will remain strong, overall fiscal policy will be less supportive in 2022. This should not be a surprise after the “shock and awe” fiscal largesse of 2021. In the US the Bipartisan Infrastructure Deal will start up next year and the larger Build Back Better package currently winding through Congress should help (if it gets through the Senate).

The overall “growth impulse” from fiscal policy however will be less than in 2021. It’s a similar story in the UK where corporate and income taxes are set to rise.

In contrast, the Eurozone stands out as fiscal spending is expected to remain strong due to Europe’s recovery plan. Stimulus is slightly less than in 2021, but still significant. Meanwhile, China is expected to keep fiscal stimulus going in 2022 through higher local government borrowing, but some of it will be due to banks being

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encouraged to lend more.

With regards to monetary support (short-term policies by central banks designed to stimulate economies), we also see a move in a less positive direction in the US and UK. Here central banks are ending pandemicrelated quantitative easing (QE) programmes which have been used to inject money directly into the financial system. The Bank of England (BoE) and US Federal Reserve (Fed) are also poised to raise interest rates.

Our judgement is that central bank policy goes from positive to neutral (rather than negative) as interest rates are still low relative to the “equilibrium” rate. When an economy is at full capacity this is the rate required in order to avoid either overstimulation (and possibly undue inflationary pressures) or under-stimulation (possibly resulting in economic contraction and the risk of deflation).

banks to the private sector.

On this front the consumer is critical and here we are looking for households to spend the savings they accumulated during lockdowns. In practice this would mean a fall in the savings ratio below its pre-pandemic average of 7.5% as excess savings are spent.

The US savings rate has already fallen significantly in 2021, but it is critical for consumption that it continues to decline in 2022. This is because of the squeeze on real earnings from higher inflation, albeit we expect US and global inflation to moderate in the second half of next year. The story in the Eurozone and UK is similar although we estimate that households in these economies are at an earlier stage in running down their excess savings. Judging the situation in China is more difficult due to a lack of data, but it’s believed there are less excess savings than in the West.

FALL IN SAVINGS RATES? These changes should not be surprising as support had to come to an end once the recovery had taken hold. However, for growth to be maintained we need to see a handoff from governments and central

DIVERGENT POLICY OUTCOMES For each of the main economic blocs we have scored the different components of monetary and fiscal policy and the potential for pent-up demand. On this basis we see

considerable swings between 2021 and 2022 for the US and UK, from maximum stimulus to a more modest or neutral stance. The Eurozone remains more full on, while China swings toward more stimulus on both the monetary and fiscal side.

We expect the divergence between the US/UK and Eurozone/ China will create opportunities in bond and foreign exchange markets.

We also note many uncertainties around inflation and growth, not least those resulting from supply chain bottlenecks and labour shortages persisting. Higher wage growth feeding through into costs and prices could result in higherthan-expected inflation and weaker growth, at risk of a “stagflationary” outcome.

The emergence of the Omicron variant occurred after we finalised our forecasts, but clearly increases the risk of new restrictions on activity and renewed supply side disruption.

At this stage it is too uncertain to judge the macro impact, only that it adds to the stagflationary risks in the world economy.

Keith Wade is the chief economist at London-based investment house Schroders.

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Rands & Sense

5 points investors should bear in mind for 2022

Kapil Joshi

AS WE welcome 2022, there may be no better opportunity to look back at how the investment landscape has changed, consider where the biggest opportunities for the next 12 months will come from, and take note of which investment habits you need to shake.

A lot has happened over the last two years: cryptocurrencies have made game-changing moves, the world has embraced an entirely new way of life, and alternative investment vehicles have shown what they’re capable of.

Here are five important points to keep in mind as you figure out your investment resolutions for 2022.

1. Be aware of social media’s impact The most unusual phenomenon in the investment market in the last year or so must be ‘meme stock trading’. The most notable case of this is when investors (spurred on by one particular Reddit thread) pushed US-based company GameStop’s stock price from $20 to $350 in just two weeks. This forced Wall Street traders, who were betting the stock would decline, to unexpectedly lose a lot of money.

While the work-from-home environment made it easy for day traders to keep a close eye on stocks, it also led to a massive increase in emotional investing and trading. Knowing this, savvy investors will have to remind themselves not to get drawn in by the investment whims of the masses whenever a story breaks on social media.

2. Hedge funds are doing better than ever The much-maligned hedge fund has shown its true value over the last two years. They are increasingly proving themselves to be exactly what investors need to diversify their portfolios and access wider return sources. Hedge funds offer investors a wide array of strategies that can help them to achieve their investment goals more effectively.

3. Employment will continue to be an issue around the world Going into 2022, labour markets are still tight, with many open positions going unfilled. The phenomenon known as the “great resignation" of workers from the workforce has left many businesses with major skills gaps. In addition to this, strike and protest action has been on the rise, and may continue to grow in the coming year.

This will have critical impacts on labour costs, supply bottlenecks, and inflation – which will certainly affect the stock markets.

4. Prepare for the unexpected If the pandemic has taught us anything, it’s the importance of a personal emergency fund. If you haven’t already, now is the time to start. Ideally, you should have three to six months’ worth of living expenses in this fund, with the money kept in a low-risk, liquid account.

As soon as you have this in place, you’ll be in the best position to avoid dipping into long-term investments to pay for short-term needs if you are ever in a financial pinch.

5. Boost your retirement savings Covid-19 has caused many savvy investors to re-evaluate their ability to enjoy the retirement lifestyles they envision. In fact, many people who found that they were able to cut some of their living expenses during the lockdown have started funnelling more of their earnings into their retirement plans.

This would be a good strategy for anyone, and the fact that most of us are saving more money by working from home, provides the perfect opportunity to put more money into our retirement vehicles.

Kapil Joshi is Head of Collective Investments at Momentum Investments.

FACT FILE

INTEREST RATES AND INFLATION Interest rates and inflation tend to go hand-in-hand, because raising interest rates is one way in which central banks can control inflation. The SA Reserve Bank has successfully controlled inflation in South Africa in this way for the last two decades or more, with the aim of keeping it within a range from a minimum of 3% to a maximum of 6%. As can be seen in the lower graph, inflation has only occasionally breached that range.

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Planning Perspectives

How to beat inflation in 2022

Palesa Tlholoe

LOOKING back at 2021, the investment horizon had a thin silver lining below those black Covid clouds that just won’t go away.

Most equity portfolios rebounded, which means if you stayed invested, you were compensated for losses endured during the economic downturn in 2020. In fact, some portfolios surpassed their prepandemic returns.

Economic activity recovered in the first half of 2021, rising by 7.5% compared to the first half of 2020, but sadly this positive momentum was halted by the public violence in July in the midst of the third wave.

As we ease into 2022, inflation seems to be the biggest threat to local and global markets. Locally, inflation stood at 5% in October 2021 (compared with an average of 3.2% earlier in the year). This was within the South African Reserve Bank’s (SARB’s) monetary policy target range of 3 - 6%.

The expectation for 2022 is it will remain at an average of 5%, which is slightly above the midpoint of the targeting band. But this might be easier said than done. National Treasury projects that real economic growth will be a meagre 1.8% in 2022, and the SARB also recently increased the repo rate by 25 basis points to 3.75%. (Coming off a record low, but still.)

These factors don’t bode well for inflation, which begs the question: How to invest in the new year? A focus on inflation-beating returns seems to be the solution…

How does inflation affect investments?

Inflation causes the value of your money to diminish. If you’re invested in cash, like a money market fund or a bank deposit, and the inflation rate remains at around 5%, your investment might not generate significant returns. Cash instruments generally give an annual return of 3 - 6%, which is not inflation-beating

enough for a long-term investor.

Ideally, for a medium- to long-term investment, you should be seeking at least 3% above the inflation rate.

If your investment requirement is short-term, however, then a cash fund serves its purpose. With an emergency fund, for example, the priorities are stability and easy access to the money, not necessarily beating inflation.

How to inflation-proof your portfolio The sensible solution for a long-term goal is a multi-asset fund that has some exposure to growth assets.

If you have time in the market, a balanced fund makes a lot of sense as it will generally deliver good returns over and above inflation, regardless of whether the inflation rate remains within the target range or goes a bit higher.

A balanced fund is a multi-asset fund with a high exposure to equities (shares), along with exposure to other asset classes like property and offshore. Not all balanced funds are the same – some are more aggressive (more heavily weighted towards equities) and some are more conservative. Speak to your certified financial planner (CFP) to find the best long-term fund that suits your risk appetite and portfolio makeup.

Likewise, your CFP will also be able to advise on the best fund for a medium-term investment, where you would typically want less risk and more capital stability. In this case, a multi-asset income fund might be the solution, due to its higher exposure to bonds. Bonds are less volatile than equities, but investing in them should still allow you to comfortably beat inflation.

All the best for 2022 – I hope it’s your best financial year yet!

Palesa Tlholoe, CFP, is co-founder and a wealth manager at Imvelo Wealth

INFORMATION

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click on the links to visit the website

Here are sources that can help you with financial education, give you more information on savings and investments, and afford you recourse if you have a consumer complaint or a complaint against a financial services provider

FINANCIAL EDUCATION Financial Sector Conduct Authority MyMoney Learning Series https://www.fscamymoney.co.za South African Savings Institute #WaysToSave https://waystosave.co.za/ OMBUDSMAN & REGULATORS Ombudsman for Banking Services ShareCall: 0860 800 900 or phone: 011 712 1800 Email: info@obssa.co.za www.obssa.co.za CONSUMER ISSUES National Consumer Commission Toll-free: 0860 003 600 or phone: 012 428 7000 Email: complaints@thencc.org.za www.thencc.gov.za CONSUMER GOODS AND SERVICES OMBUD ShareCall: 0860 000 272 Email: info@cgso.org.za www.cgso.org.za

FINANCIAL ADVICE Ombud for Financial Services Providers phone: 012 470 9080 or 012 762 5000 Email: info@faisombud.co.za www.faisombud.co.za INVESTMENTS Financial Sector Conduct Authority ShareCall 0800 110 443 or 0800 202 087 info@fsca.co.za www.fsca.co.za LIFE INSURANCE Ombudsman for Long-term Insurance ShareCall 0860 103 236 or phone: 021 657 5000 Email: info@ombud.co.za www.ombud.co.za MEDICAL SCHEMES Council for Medical Schemes MaxiCall: 0861 123 267 Email: complaints@medicalschemes.com or information@medicalschemes.com www.medicalschemes.com

CREDIT OMBUD MaxiCall: 0861 662 837 or phone: 011 781 6431 Email: ombud@creditombud.org.za www.creditombud.org.za

RETIREMENT FUNDS Pension Funds Adjudicator ShareCall: 0860 662 837 or phone: 012 346 1738 Email: enquiries@pfa.org.za www.pfa.org.za

NATIONAL CREDIT REGULATOR ShareCall: 0860 627 627 or phone: 011 554 2600 Email: complaints@ncr.org.za or (debt counselling) dccomplaints@ncr.org.za www.ncr.org.za

SHORT-TERM INSURANCE Ombudsman for Short-term Insurance ShareCall 0860 726 890 or phone: 011 726 8900 Email: info@osti.co.za www.osti.co.za

TAX Tax Ombud ShareCall: 0800 662 837 or phone: 012 431 9105 Email: complaints@taxombud.gov.za www.taxombud.gov.za PROFESSIONAL ORGANISATIONS Fiduciary Institute of Southern Africa (FISA) phone: 082 449 2569 Email: secretariat@fisa.net.za www.fisa.net.za Financial Planning Institute of South Africa (FPI) Phone: 011 470 6000 Email: info@fpi.co.za www.fpi.co.za South African Institute of Tax Professionals (SAIT) Phone: 012 941 0400 Email: info@thesait.org.za www.thesait.org.za FINANCIAL DATA ◆For ◆ the latest financial market indicators, go to https://www.iol.co.za/businessreport/market-indicators ◆For ◆ the latest quarterly unit trust performance, go to https://www.iol.co.za/ personal-finance/collective-investments ◆To ◆ look up performance of a particular unit trust fund go to https://www.iol.co.za/ personal-finance/fund-look-up