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27 Jan 2022

THE YEAR IN REVIEW — And what’s in store

Last year kicked off optimistically with the pandemic-stained ‘annus horribilis’ of 2020 left behind. Behind this mini psychological victory there were other reasons for early optimism. NICK CURTIN writes about the year that was and what could be in store for investors in 2022.

The unprecedented speed with which vaccines were made available en masse offered early hope that socio-economic activities might quickly return to normal. Expectations for a ramp up in US fiscal spending, record levels of monetary stimulus and China’s rapid economic recovery augured well for resurgent economic growth. South Africans relished the relaxation of beta-wave restrictions that had curtailed summer holiday spirits and pent up consumer demand started to unleash. Prospects of watershed local elections later in the year also created some silent hope.

But it was soon clear that another year of nerve-wracking turmoil lay ahead. On 6 January, incredible scenes in Washington DC of disgruntled Trump supporters violently occupying the Capitol shocked the world. First signs of rising inflationary pressures also sparked alarm, as re-opening economies bumped up against constrained global supply chains and energy shortages. It also quickly became plain that new COVID-19 variants would continually assail the globe.

But unambiguously dovish and globally coordinated central bank actions rapidly allayed market fears. Developed market consumers (notably in the US) were flush from government emergency income-replacement programs. They spent with abandon, powering the economic recovery. Combined COVID-19 global support programs now exceed $31 trillion, resulting in record levels of government debt globally. We have borrowed from the future to save the today.

Midway through the year, the more virulent Delta variant caused market flutters. Inexcusable delays in vaccine procurement and rollouts across most emerging markets and even in the EU (which embarrassingly lagged US and UK efforts) compounded matters. Markets were nevertheless largely unfazed: corporate earnings steamed ahead, central banks maintained extreme monetary policy settings, and indications were clear that US fiscal policies would still be exceptionally expansionary—even as emergency direct-to-consumer fiscal support measures started to fade.

As the year got underway, China seemed set for annual GDP growth exceeding 8%. However, momentum faded into the second half as the country sustained its first pandemic-related GDP contraction as swingeing regulatory interventions and potential credit default by China’s largest property developer spooked investors. GDP growth for the year is likely to have been among the lowest in almost 30 years.

In South Africa, the economy continued to recover on increased production in agriculture, mining and trade as well as a solid rebound in consumer spending. But manufacturing, construction and the leisure and tourism industries are still mired in recession. Unemployment levels are stubbornly high with little prospect for recovery. Debt metrics only improved after Stats SA rebased SA GDP after a routine review. The positive revenue surprise from a massive rally in the country’s commodity exports has also temporarily improved public finances.

Sadly, the seemingly orchestrated, violent and deadly looting in large parts of KZN and Gauteng in July caused significant damage to property and investor sentiment. The economy can ill afford such self-inflicted wounds. It was a timely reminder perhaps of the unsustainably high levels of inequality. Combined with lacklustre, obsolete and ideologically driven economic policy, it supports our thesis of structural weakness of the South African economy and the rand.

Notwithstanding the multitude of nail-biting events and mounting risks, financial markets globally and in SA recorded a stellar year as the ‘everything rally’ continued—such has been the power of the decades-long experiment in extremely low interest rates, latterly combined with massive governmental fiscal injections.

Looking forward, it seems that the multi-decade epoch of low and falling inflation which has allowed central banks the policy space for such largesse is now mostly behind us. Central banks and governments appear to have finally reached their limits, with little choice now but to withdraw extreme levels of support. The policy toolkit is empty and must be replenished—failure to do so can only result in calamity farther down the road.

Most asset classes are trading at historically expensive valuations. Any economic or geopolitical shock (of which there could be any number) may cause 2022 to be a watershed investment year. Notwithstanding external shocks, asset class returns will in general be lower in the years ahead. It is also probable that after a decade of very low dispersion, returns across and within the major asset classes and their sub-components will bifurcate. There will be clear winners and losers in this changing paradigm.

Nevertheless, well-diversified investors can still achieve inflation-beating returns. This will require careful positioning and avoidance of investments with the highest risk of permanent capital loss. To finish first, first you must finish. Foord has been refining its investment strategy over the last few years for precisely this watershed moment. We expect that investor patience will soon be well rewarded.

 

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