It is very natural to be circumspect of anyone who touts optimism in light of what we have all been through over the last two years. In fact, it is in our natures not only to expect that the most recent past is the best likely predictor of the future, but also because most of us are in the habit of lying awake and worrying about what could all go wrong.
While the doom-and-gloom articles will likely be in abundance as we go into 2022 (it is always easier to be negative) we thought it might be useful to also consider some of the reasons as to why the coming year might not be quite as bad as many would predict.
Reason 1
It would be reckless of us to suggest that there are not a myriad of potential reasons for concern, including from an investment and political – local as well as international – perspectives. As fewer news headlines are being grabbed by ongoing COVID-19 concerns (which is almost certainly not yet a thing of the past), attention turns to the many weaknesses which the last two years have exposed and brought to light. The upside of problems aired however is that it allows us the opportunity to realistically assess what was previously an unknown – a bit like opening the curtains in a dimly lit room where we previously only saw outlines or shadows lurking.
Reason 2
Front of mind for most South Africans is our current dire state of local politics, state capture and dysfunction. Yet the upside to this is that there is undoubtedly a growing polarization of opinion, in part also spurred by the release of the recent Zondo Commission report. We take heart from the fact that the current political machinery is so broken that it is forcing self-reflection and introspection to the point that many more voices from across the political spectrum are coming to the fore in defense of what must surely be a potentially better way forward. The process will not be quick, nor will it be painless, but it is part of the gradual healing which many South Africans so badly crave.
Reason 3
The other area locally which may very well result in forced change for the better in the coming year is with regards to the now almost ubiquitous load-shedding, which is very likely to quite aggressively rear its head again in 2022. Whereas there have been strong senior political proponents for no or little change regarding the country’s dependency on nepotistic coal alongside the refurbishment of Koeberg nuclear power station which has now just begun, and which will place additional strain on the grid, we do believe that the path will forcibly be forged for a more sustainable solution which will involve less dependency on state assets and greater freedom of third-party energy providers. SA is primely positioned geographically to take advantage of this and in the wake of further power outages this year we believe the stage might very well be set for this transformation to begin in greater earnest.
Economies across the globe are also gradually re-opening with increased frequency and optimism. Whereas the last two years have seen politicians across the globe aggressively pander to our worst fears (quite rightfully many may argue), this is likely to be replaced by an improved sentiment this year. We believe that the debate will slowly shift from whether or not it is constitutional to enforce vaccinations, to how we safely return to a life of greater normality.
Reason 4
From an investment perspective, the coin also has two sides. Internationally equities have rallied extremely well over the last 18 months in particular. Whereas US valuations (and specifically big cap tech stocks) are trading at very rich multiples, as economies start to re-open many of the current supply shortages will gradually work their way out of the system. Most commonly cited examples of this are semi-conductor shortages and the impact that this has had on numerous sectors (from automotive through to consumer electronics) as well as global imbalances in shipping. As our grandmothers would famously say, “this too shall come to pass” – most likely towards the tail-end of this year according to most economic analysts’ forecasts.
In and amongst the current recovery turmoil, South Africa has actually been a massive benefactor of the resulting commodity price boom which has also resulted from the global restart. Whereas most consumers might be focused on the unpleasantness of the increase in the petrol price, our local economy has benefitted massively financially from the increased global demand for commodities. This has translated into a very beneficial current account surplus which, given languid growth and protests last year, could hardly have come at a more opportune time.
Reason 5
Last but not least, as equity valuations in the US trade at inflated multiples, investors are forced to look elsewhere for longer-term growth. This benefits not only other developed market economies but brings a semblance of sanity into consideration for where longer-term growth is likely to be more prevalent, namely in Emerging Market economies. Without undue investment risk, we believe that regardless of whether we face a market retreat at some point in the near future, the longer-term outlook for many emerging market economies remains upbeat as growth is set to handsomely surpass that of their developed market counterparts. The caveat, of course, is that this is greater certainty over the longer term, whereas if markets correct then in the short-term all markets may come under pressure.
In summary, there are many potential reasons to remain cautious and careful (as one should), but there are also several well-founded reasons for optimism going into 2022. Although not all of these may be destined to come to fruition this year already, we take heart from the possibilities of where we go from here.
“The intelligent investor is a realist who sells to optimists and buys from pessimists.”
Benjamin Graham
By Francois Cilliers