The returns on investment in 2021 have been exceptional

I find the end of each year strange. It’s as if everything is counted on December 31st and regardless of what happened during the year, January 1st is a new beginning. Outside with the old, with the new… .with the bad, with the good…. Then over the month of January reality sets in and we realize (as if we didn’t know) nothing has changed, and we still have to face the challenges and demons of the previous year. This applies to all aspects of life, business, politics, pandemics, and investments.

In 2021, an astonishing $ 17 trillion was added to global wealth by global stock markets. Even more amazingly, $ 14 trillion has been added by the US stock market alone! For the past two years, it was really not about Germany, but “America über als! This led to the following scenario in the United States:

  • US equity markets are at an all time high, which includes the S&P 500 as well as the Nasdaq.
  • Home prices are at an all time high.
  • The crypto market capitalization is at an all time high.
  • Salaries are at an all time high.
  • Job vacancies are at an all time high.
  • Inflation is at its highest for 30 years.

Clint Eastwood aka Dirty Harry comes to mind when he asks, “Are you feeling lucky, punk? … well, isn’t it?” (Without reference to any of the readers!). When investors reach a point of exuberance after above-average and often ridiculous returns as we have known from certain sectors of the US market and crypto investments, it becomes difficult to tone down the expectations of these investors. Greed (as opposed to fear in turbulent markets) sets in and investors often choose to spend more money on these fantastic investments.

So, are you investors feeling lucky? The graph below shows the relationship between the SPX Index (S&P 500 Options Index) and the 10-Year US Treasury Bill Index. The periods to be taken into account are the SPX index 1999 indicating the liquidation of the tech bubble, the start of 2007 of the GFC (Global Financial Crisis) and 2020 when we encountered the Covid-19 pandemic.

The trend of Treasuries offering yields well below inflation and the slope of the SPX index line above 60 degrees since post-GFC is unsustainable. Something has to adjust, and it will probably be both … The two lines shown above should come much closer to each other.

As mentioned earlier, interest rates are a function of inflation. If inflation rises or is expected to rise, interest rates are adjusted upward. Interest rates and long-term bonds in the United States and Europe still offer negative real returns and this is not sustainable. Either the Fed will adjust interest rates up, or the equity market will adjust interest rates. However, interest rates can stay low for a while just to force economic recovery.

My question should actually be, “How lucky are you to envision an investment horizon of five years or more?” “. We know that the best long-term asset class against inflation is stocks. We also know that price matters and that stocks bought at the lowest intrinsic value are the most likely to provide the best returns over the long term. At least that was the case until the start of Cocid-19 when many investment theories flew out the window.

From the start of Covid until now, the stars of the performance have been tech stocks and outliers like Tesla and cryptocurrencies. From an evaluation point of view, it didn’t make much sense. The stratospheric returns of technology companies are still understandable with the explosion of online transactions and the pace of development of the sector. Tesla and crypto overtake me. Tesla has yet to make a decent profit and there are companies like BMW that are innovative in electric cars like Tesla with lasting profits at a much better price. Tesla’s price is that all vehicles in the world will be electric by 2030 and all will be Tesla. Thanks to Elon Musk, he is a master of innovation and a grand master of marketing and manipulating the crypto markets and the Tesla share price.

What is clear from the latest data is that there is a new kind of investor that we need to consider. The one who ignores the principles of investment and prices. Anyone who believes in tomorrow’s history and this technology, be it systems or currencies, will eclipse everything in the future. As exciting as it sounds, the dangers inherent in this prospect can lead to serious losses if extreme trading continues. It will also have a severe impact on how indices will be represented and on the volatility of technology-rich global indices.

By the end of 2021, it is expected that there will be over 10,000 cryptocurrencies in existence. At the same time, there are over 1,000 failed cryptocurrencies and many of the current 10,000 will follow. The crypto market has a low barrier to entry. Anyone who has an idea about coding and has a plan can create their own cryptocurrency.

Many investors have made spectacular returns from crypto. How many have lost fortunes. Crypto is not yet a currency. As a traditional investor, I find it difficult to understand the price of an asset that cannot be touched, which does not pay off, which cannot be used to make something, which is not linked to an economy or something of value and the creator of the biggest coin has never been seen….

Having said that, I also tried Ethereum about five years ago and made over 1000% profit when I sold my holdings a few months ago. What a return! However, I consider this to be speculation and gambling and I have no intention of allocating large amounts of money to crypto.

My apologies, I differed somewhat. Coming back to my comments on the market and pending…

I have commented on the US market and the tech sector in particular. I also want to make it clear that there are areas in the US market that offer good value, not all assets are expensive, and there are most definitely pockets of value that will benefit from consumer spending thanks to the government. American who enriched many citizens.

Where I see deep-rooted value is in emerging markets. Why am I saying that ? Currently:

  • Emerging market debt is lower than that of developed markets.
  • Inflation in emerging markets is lower than that in developed markets.
  • Emerging markets grow faster than developed markets, and they already produce nearly 70% of global GDP.
  • Emerging markets trade at a discount of almost 30% to developed markets.

China leads the emerging markets, but it has its own issues:

  • Regulatory announcements in progress.
  • The failure of China’s second-largest real estate developer, Evergrande (the Lehman moment in China?).
  • Shortage of electricity (it is not only the SA that has this problem…).

Whatever the challenges and risks (which we cannot ignore), China may be the country that will lead market returns over the next five to ten years. If we can look beyond the regulatory changes that China has aggressively enforced virtually overnight, then there is an opportunity that cannot be ignored. The drive to strengthen consumerism in China is aggressive and determined …

In the same basket as China nestles the good old SA …

Our economy is shattered and without electricity there is not much we can do to restore it. Unemployment, corruption, corporate governance and low productivity with heavy labor laws make it difficult to attract new investors.

However, the assets of the SA suddenly seem very cheap, and we have recently seen real capital flowing into the SA with deals where Pioneer, Afrox, Imperial, Distell, AVI and Omnia have all been bought by foreign companies.

Ratings look cheap overall with low multiples and high dividend yields. Corn:

  • there are unknown fiscal risks;
  • unemployment and social benefits are here to stay;
  • demand policy reform;
  • the power outages are here to last for a few more years;
  • interest rates are rising; and
  • sustainability of commodity prices?

Regardless of the above, we must remember that over 60% of listed companies are not SA-focused. With assets traded at 2011 prices, there is high upside potential over the next four years.

In summary, my take on global markets over the next five years is as follows:

  • Developed markets are fully valued with pockets of value in certain sectors. Europe and Japan over the United States.
  • Emerging markets, especially China, promise a decent rise. Be aware of the risks.
  • South Africa is showing a decent value with a steep discount in certain sectors such as finance. The sustainability of resource prices is questionable, but resource companies are much better structured financially than in the past.

The challenges of the next five years:

  • Higher global inflation. Transient theories of inflation are moving towards longer-term inflationary trends.
  • Rising global interest rates.
  • Rising global bond yields (implying capital losses on short and medium term global bonds).
  • Global debt is high across the board. Developed countries and China can print money to meet domestic debt. This is more of a challenge for small emerging countries where printing money will cause the currency to depreciate.
  • Rand exchange rate. Your guess is as good as mine… It all depends on the world view and whether they agree with my theory that EM is the place to invest. If this happens, the rand may remain limited to a value close to fair value between R14.50 and R16.50. If Covid-19 persists and the world goes into “safe mode” and ignores EM, the rand will slip and R18 may be in range …

Ultimately, if you’re a long-term investor, none of the above really matters. If you are a stock picker, good luck. If you are investing through funds or trackers, stay invested. Trust your fund manager and enjoy the holiday season.

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