VIEW OF THE MONTH NEWSLETTERAPRIL 2022
As hope of finding loved ones fades, our hearts go out to the people of KwaZulu-Natal who have suffered great losses due to the devastating flooding during April’22. Almost 450 people are reported to have passed away from the disaster described as unprecedented and the worst in living memory.
Humanitarian aid group Gift of the Givers said it’s seen a phenomenal response from South Africans following its call for water donations. “It showed the spirit of uBuntu is overflowing. It just shows that the future of this country is bright as you can see how everyone comes together for their fellow countrymen” said the organisation’s Ali Sablay.
Gift of the Givers said hot meals, blankets, bottled water, warm clothes, sanitary pads, and diapers are the initial requirements for those in low-lying areas who have lost their possessions. Anyone who wants to donate via Gift of the Givers can make a monetary donation to:
Bank: Standard Bank
Account name: Gift of the Givers
Branch code: 057525
Account number: 052137228
Reference: KZN Floods.
They request that the deposit slip is sent to firstname.lastname@example.org for a formal acknowledgment and to request a section 18A tax-deductible certificate.
In this month’s newsletter we cover the following topics:
1. S&P 500 booked its worst start to a year since 1939
1.1 What went “wong”?
1.2 What to do?
1.3 How to diversify?
2. Capital protected investment opportunities
3. Ways to steer clear of underinsurance
4. Rand forecasts
5. Fuel Prices
6. Chart of the month
7. Interesting stats for the month
8. Market Stats
9. Financial indicators as at 29 April 2022
To say that the markets have been testing our nerves is an understatement. According to this article by Market Watch (online financial news site), the S&P 500 booked its worst start to a year (down 13.3%), through the first four months of 2022, in over 80 years (since 1939), with the steepest decline in April’22 (down 4.9%).
|First 4 Months % Change
|Source: Dow Jones Market Data
The above stats are provided in US Dollars. In Rand terms the S&P500 decline was worse, and it was down 14.3% through the first four months of 2022. The difference is due to the Rand strengthening almost 1.2% during the same period.
It is important to note the equity market is NOT in a “bear market” as that requires a decline of at least 20% from its recent highs, which is clearly not the current case.
Global growth is slowing because of many macro factors:
Elevated geopolitical tensions
• Russia invasion of Ukraine – With negotiations not progressing, it seems that peace is far off. The Ukrainian and Russian economies are key suppliers of commodities, including titanium, palladium, wheat, and corn. Disruptions to the supply chain of these commodities could keep prices high, intensifying risk for users of such commodities (including car, smartphone, and aircraft makers).
• SINO West aggression – Chinese regulators recently met to discuss how they could protect the country’s overseas assets from US led sanctions. Russia was caught off-guard when offshore assets were frozen and accordingly China has been put on alert by the US and its allies, of their ability to similarly freeze their vast foreign assets.
High US inflation – Although the US is less exposed to the situation in Ukraine than Europe, economic growth concerns are still present. Despite a slightly weaker economic outlook and given the surging inflationary backdrop, it is suspected that the US Federal Reserve Bank (US Fed) will continue with tightening plans and frontload a series of interest rate hikes to demonstrate its commitment to fighting inflation. With the worst of inflation concerns now priced in, the market is clearly still concerned about the impact of quantitative tightening, as the era of easy money comes to an end.
China’s zero-Covid policy – has been among the strictest approaches to tackling the pandemic anywhere in the world, causing a slowdown in economic activity. Tens of millions of people in China, including the largest city and financial centre, Shanghai, were put under lockdown during April’22. But there is hope as the stakes for Chinese president Xi Jinping is high, this as he aims to take an unprecedented third term as head of the Chinese Communist party, state, and military later this year. His carefully cultivated image as a strong and competent leader could be badly tarnished if the government loses control of Covid — or blunders into an economic crisis while trying to contain it.
China’s tech crackdown – Over the past year, China has launched a relentless crackdown on big tech firms, with a raft of new regulations aimed at curbing consumer rights abuses, monopolistic market practices, breaches of consumer data privacy, protecting minors from gaming addiction and curbing content deemed socially harmful – among other things. Chinese state media however recently reported that the country’s top leaders had vowed to boost growth. They also promised to “promote the healthy development” of the internet economy and “introduce specific measures” to support the sector.
Except for Russia’s invasion of Ukraine, it seems that the other factors are under control and coming to a point.
The most important thing to keep in mind during a market decline is that it’s normal for the equity markets to have negative years — it’s part of the business cycle. If you’re younger or a long-term investor, you have the luxury to sit it out. Investopedia offers the following advice during these times:
Keep your fears in check – There is an old saying on Wall Street: “The Dow climbs a wall of worry.” In other words, over time the Dow has continued to rise despite wars, economic woes, terrorism, and countless other calamities. Remember that fear is an emotion that can cloud rational judgement of a situation. In other words, keep calm and carry on.
Play dead – There’s an old saying that the best thing to do during a bear market is to play dead – it’s the same protocol as if you met a real lion in the bush.
Fighting back would be very dangerous. By staying calm and not making any sudden moves, you’ll save yourself from becoming a lion’s lunch.
Invest only what you can afford to lose – Investing is important, but so is eating and keeping a roof over your head. It’s unwise to take short-term funds (i.e., money for the mortgage or groceries) and invest them in stocks. As a rule, investors should not consider equities unless they have an investment horizon of at least five years
Look for good values – Value investors such as Warren Buffett often view declining markets as buying opportunities because the valuations of good companies get hammered down along with the poor companies and sit at very attractive valuations.
Diversify across different asset classes – This is such an important topic, so we have dedicated the next section to it.
Nobel Prize winner Harry Markowitz coined the phrase “the only free lunch in finance is diversification”. At Vista Wealth we live by this statement, and we diversify investments accordingly across different asset classes, sectors, industries, and geographical countries. It is important that the investment allocation ties back to the investor’s investment goals. For example, younger, and clients with long investment horisons can have large asset allocations to equities riding out periods of market decline.
Retirees withdrawing from their investments are at risk withdrawing from their investments during market declines. Sequence risk is the danger that the timing of withdrawals from a retirement account will have a negative impact on the overall rate of return available to the retiree. During a bull market, the retiree’s withdrawal will be offset at least in part by new gains. During market decline which could last for months or years, each of the withdrawals is taking a bite out of their investment portfolio and is not being offset by gains and new deposits. In other words, withdrawing from an account that is steadily shrinking in size.
As a result, portions of a retiree’s investment portfolio are allocated to asset classes like interest bearing money market, bond, and income funds. But considering a 5% withdrawal and 5% inflation rate, these asset classes will not grow enough to satisfy a retiree’s investment goals. Equity has historically proven to be the best performing asset class. It does, however, come at a price called volatility caused by market declines. By combining money market, bond, and income funds with a healthy portion of equity, retirees hope to secure a good return that is not too volatile while avoiding sequence risk.
As indicated in the introduction, geographical diversification is also important. It’s the financial equivalent of not putting all your eggs in one basket. Geographical diversification is based on the premise that financial markets in different parts of the world may not be highly correlated with one another.
So how much must be allocated to the equity asset class and how much of this equity allocation must be offshore to satisfy geographic diversification? In a recent study by Ninety One, they found that a typical retiree with a 5% withdrawal rate should have an allocation of 74% towards the equity asset class which is made up of 42% offshore and 32% local equities. In general, their study found that for retirees with higher incomes, high equity funds are more appropriate.
Many investors cannot tolerate the volatility associated with equity markets but require the growth equity markets offer. Capital protected investments provide these investors with exposure to equity markets while protecting (fully or partially) their initial capital.
Capital protected investment opportunities currently on offer are summarised in the table below:
|* Investment name
|Term and potential return
|Sustainable World Capital Enhancer
|Portfolio of global companies contributing
to the UN’s
|Sinking fund policy
|5Y geared return @ 400% (4 times) if positive
|Euro Stoxx 50 Digital Plus
|First 40% decline protected
|JSE Stockbroking account
|3.6Y investment term with a minimum return of 55% in ZAR if the index ends flat or positive
|East Asian Growth Basket Limited
|USD or AUD
|S&P 500 (45%)
Euro Stoxx 50 (20%)
Nikkei 225 (20%)
Global emerging markets ETF (15%)
|5Y investment term. Return capped at a basket growth of 40%.
|Momentum Enhanced Growth Option
|Diversified global index
|15% secured return
15% participation threshold
350% participation rate
|End of June
* Click on the investment name to view the detailed brochure
Vista Wealth clients made substantial investments in the Investec Euro Stoxx Select Dividend 30 Autocall during April’22. Investec is giving participants that missed out on this opportunity another bite at the cherry, well sort of. In the table below we list the differences between the two instruments:
|Euro Stoxx Select Dividend 30 Autocall
|Euro Stoxx 50 Digital Plus
|Open for business
|No, closed in April’22
|Yes, closes 10 June’22
|Euro Stoxx Select Dividend 30
|Euro Stoxx 50
|Maximum 5 Years
|Autocall – compares annually if index flat or positive. If true, payoff
|Digital – compares at end of term if index flat or positive. If true, payoff
|Payoff if index flat or positive
|17.5% per annum
|55% minimum PLUS unlimited uncapped upside above 55%
|First 30% decline protected
|First 40% decline protected
|ZAR or USD
Over their lifetime, the average middle-income family accumulates assets and personal belongings ranging from houses, vehicles, sports equipment to household appliances, clothing and other accessories. In a perfect world, one would only have to replace these assets due to old age or accidental damage. Regrettably this scenario is overturned by a multitude of risks which includes and is not limited to theft, accidents, fire, quakes, subsidence and other natural disasters.
Total risk mitigation in a portfolio is never full proof. One of the most common mistakes that insurance consumers make is to underinsure – this means that your assets or household contents are insured for much less than the actual replacement value. With insufficient insurance coverage the policyholder will be liable for a large percentage of replacement costs.
There are numerous ways to build the best possible risk management solution within your short-term insurance portfolio and avoid underinsurance. If you are looking to reduce your monthly premiums then rather increase your excess structure, remove certain items which remain at home/safe and combine buildings and vehicle insurance.
Another important consideration when taking up building insurance is that the market value does not represent the cost of rebuilding it, these properties are likely to be underinsured during weak property market as the price of rebuilding a home is often higher than its market value and vice versa. You should revalue your insurance portfolio every 12 months to make sure you purchase cover for the replacement value of the items insured
Feel free to contact email@example.com or 0721513458 for a complimentary review.
Emerging market currencies across the board have tumbled over the past couple of weeks off the back of increasingly hawkish commentary from the US Fed which is widely expected to move in 50bp hikes at its next four meetings. South Africa’s Reserve Bank (SARB) is not expected to move in these increments over its next three MPC meetings, and this has added to the negative market sentiment against the rand.
The negative impact to SA’s trade balance from the extreme floods in KZN during April and disruptions to exports, will have had a particularly negative effect on the domestic currency, along with lower commodity prices. The large trade surplus has been a key rand support.
Lastly, the sell in May and go away phenomenon, or start of the Northern Hemisphere summer, typically has a negative effect on emerging market currencies and other risk assets.
Below Investec’s most recent “expected case” exchange rate averages per quarter:
The Department of Energy has published the fuel price adjustments for May 2022, showing a slight decline for petrol, while diesel vehicle owners in South Africa are not so lucky. The new prices took effect on Wednesday, 4 May’22.
An important note is that price changes in May’22 will differ across all magisterial district zones due to the different transport tariff increases and decreases that will be implemented in the month.
The table below summarises how the price changes will generally reflect at the pumps:
Russia’s invasion of Ukraine presents risk to inflation more so than growth, given their relatively low contribution to global GDP but relatively large contribution to mineral and soft commodity production.
Even though not a chart, the satellite image below is of Shanghai port (the world’s busiest port) with 470 cargo ships in limbo waiting to deliver goods to China.
*Credit to Kim Littler from Ninety-One for the above interesting charts
- 0.5% – the amount that New Zealand’s central bank raised the interest rate by – their biggest increase in 22 years following worries about surging inflation
- 1 367 – the number of new employees hired by Capitec over the past year
- 3.6% – the amount the IMF now expects the world economy to expand by in both 2022 & 2023 – a sharp deceleration from growth of 6.1% in 2021.
- $5 billion – the amount Ukraine needs monthly to keep its economy afloat. The estimate doesn’t include the costs of postwar reconstruction.
- $182 million – The value of the digital assets stolen by a hacker from a new algorithmic stablecoin project called Beanstalk. Since August’21, there have been 37 hacks in 38 weeks that have drained about $2.9 billion worth of cryptocurrencies.
*Credit to Kim Littler from Ninety-One for the above interesting stats
The red block shows the market stats for the month of April 2022. In short, the JSE All Share Total Return index was down ↓-3.7% for the month (up ↑12.4% for the last 12 months). All sectors were negative. The Listed Property sector was the least down (↓-1.4%) while the Financial sector was down a massive ↓-7.4%.
Global indices: NB! Returns are measured in Rand percentage points. For example, the S&P 500 was down -2.13% for the month as measured in Rands
Currencies: *NB! Positive indicates ZAR has weakened for the period, vice versa
The information contained in this e-mail is of a general nature and is not a substitute for professional advice. We recommended that you obtain specific professional advice before you take any action. Vista Wealth Management takes all reasonable steps to ensure that the content of this e-mail is accurate and up to date, however, errors and omissions may occur. The accuracy of the information contained should therefore not be relied upon as a statement of fact.