4 minute read
Your investments
Time for a view above the clouds
If you are reading this, you must be flying and perhaps you have been yearning for a while to see the world from a different angle. Covid-19, and yes I won’t use that word again in this article, has clouded much of our 2020 vision.
One of the things that remain constant is that we have certain dreams and obligations that we want to meet and our investments need to work for us. This is the case for people and businesses all over the world. What I’m trying to say is that Namibians and people living in other countries are all in the same boat (or plane in this case).
The chart below gives us some very interesting clues as to what we can expect. The black line is what happened to interest rates in the US and the yellow lines are how the market expected rates to develop since 2005. Since the Global Financial Crisis of 2008/2009 interest rates have been low relative to history, but the market now finally expects interest rates to be lower for longer. I’m showing you US interest rates, as – although the world this time around got a “cold” when China sneezed – the world usually (at least since 1945) got a cold from the US.
As I mentioned, we are all in the same boat and low rates for US investors mean higher probabilities of not meeting those dreams or obligations. What makes this worse is the potential for inflation (prices) to eventually pick up, when all of this excess money that has been created, chases the same amount of goods and services as the economies start to slowly open up again. The problem with inflation is that it is a very subtle tax that slowly steals away the purchasing power of your assets and it is therefore imperative to achieve a return above inflation (a real return). If rates are close to zero (or even negative in Europe) you will achieve a negative return once you factor in inflation. US 10 Year Treasuries are at 220 year lows. Naturally, investors have been looking at other asset classes that can provide a relatively better return than interest bearing assets such as bonds (in developed markets) and it should be no surprise why equity markets (especially, for example, the S&P 500 index in the US) has gone to record levels relative to history. One can argue that certain parts of the market have benefitted the most (for example, the top 5 “technology” stocks of the S&P 500 is ± 23% of the whole index) but the main point is that the excess money is looking for returns in a world of low interest rates.
It is also interesting to note that the traditional way of dealing with inflation is to increase interest rates. This time around many would argue (and that is exactly what the chart is telling you) that the US cannot allow rates to rise significantly as their debt levels are too high (in other words, they simply cannot afford it if economies are not growing). Hence, we can expect a loose monetary and fiscal policy to continue for a while. This has the potential to create a global debt crisis, but no one can really predict when and how this might unfold.
As a Namibian you rightly should be diversifying your assets against country-specific risks, but you might be ignoring South African and Namibian opportunities at your own peril, while the rest of the world (which has the same need to increase returns) is starting to look for opportunities on our doorstep. These markets are very small compared to the rest of the world, and any slight rotation (literally crumbs falling off the table) out of developed markets into emerging markets can have a meaningful impact on asset prices. We started seeing this happen in November last year, with net foreign inflows into SA bond and equity markets. South Africa and Namibia, for example, provide some of the best value you can find on the planet in certain bond yields and parts of the stock market. Recent data shows the JSE (excluding Naspers) as the 4 th cheapest emerging market index in the world. Many high-quality companies, which often have very little to do with South Africa, are trading at attractive valuation levels.
History doesn’t repeat itself, but it often rhymes (Mark Twain), and in previous cycles, where excess printing took place, emerging market currencies often strengthened as money rotated into them. The amount of printing that took place this time is difficult to fathom.
At this stage, it might be prudent to point out that I’m not trying to provide advice on where to invest, as individuals and businesses are unique and have different needs. I’m simply pointing out that the world has its own problems and it will be wise to understand your dreams and obligations
well and to build a well-diversified portfolio with assets that have negative or different correlations to various market conditions to ensure that you can reach those goals, even if the world does have a debt crash one day. The recent playbook of just taking assets to the US Dollar or other similar currencies, might not be enough. After all, the power in the world is starting to move from the west to the east and if more money is chasing the same goods, guess what could happen to commodity prices, the countries that export them, and the countries that produce real goods?
René Olivier(CFA) is the Managing Director of Wealth Management at IJG, an established Namibian financial services market leader. IJG believes in tailoring their services to a client’s personal and business needs. For more information, visit www.ijg.net.
