Notes from my inbox - January 2018
SURELY THERE MUST be a ‘system overload’ warning on its way!
What a year it has been. Looking back, it is hard to imagine that so many events occurred in 12 months only – it felt like decades had been compressed into shorter and shorter time frames.
Accelerated political and economic change is the only constant at the moment. Isolationism and populism continued to stoke unrest and strain relations between countries. For the first time in many decades, nuclear attack warning systems were tested in the US, as the erratic leader of the free world tweeted his country closer to the brink of nuclear war.
It was a year of profound political crisis, also in South Africa. At times, news headlines bordered on the surreal as we lived through a number of shocks. Long forgotten is the midnight hour cabinet reshuffle at the end of March which triggered a shock wave of ratings downgrades, the effects of which will be felt for years to come. We lost our investment grade rating, which was secured through great fiscal discipline 17 years ago. This achievement by the first democratically elected government has had a tremendous positive impact on the domestic economy. The negative political events of earlier in the year delivered a major blow to the nascent economic recovery that was widely anticipated.
A culture of patronage and corruption was truly ripping SA apart, which is why the outcome of the ANC elective conference in December 2017 was such a highly anticipated and important vote.
It has been said that in SA the worst – and the best – never happens. For now, averting the worst may seem like an excellent outcome. Hope for the best has long faded. The election of Cyril Ramaphosa as president of the ANC could bolster SA, depending on how much stomach he has for a fight, and how he and his allies play their cards, as our guest columnist , Steven Friedman, suggests.
South Africa continues to face many deep-seated structural issues, such as a very uncompetitive labour force, poor education and low productivity. New leadership of the governing party can make a difference to some of the shorter-term issues, but to truly address the long-term issues will take decades, as we detail in our economic overview.
Still, politics matter – because they materially affect and shape the trajectory of business and the economy, changing investment opportunity but also increasing risks and uncertainty. We have seen both positive and negative political outcomes over the past 18 months.
Some of the most significant positive leadership changes in the last few months took place in neighbouring countries Zimbabwe and Angola. Zimbabwe in particular was a watershed moment. It highlighted that there is indeed limits to the abuse of power, even in Zimbabwe. After 37 years of dictatorial rule, Robert Mugabe was ousted as Zimbabwean president.
The final overreach of placing his extravagant wife in direct succession while millions of desperate Zimbabweans face starvation unravelled nearly four decades of rule. So we are cautiously optimistic that the winds of change are blowing in the right direction. We know that forecasting the outcome of change and the intention of new roleplayers is tricky. But the people have demonstrated that their tolerance for long-serving dictators is wearing thin. This is a good thing for citizens and investors alike.
Without a doubt, one of the biggest cultural milestones over the past year has been the outpouring of confessions and accusations regarding sexual assault and harassment. The #MeToo movement has reached critical mass, with both Time magazine (‘The Silence Breakers’) and the Financial Times (Susan Fowler, who exposed harassment at Uber) choosing ‘people of the year’ to reflect this. It has galvanised a strong movement that I expect will meaningfully reshape many industries and traditional norms around the world. As Oprah Winfrey recently put it, "a new day is on the horizon...".
No account of the past year would seem complete without mentioning Bitcoin. In our previous edition we articulated our views on blockchain (a revolutionary new technology which we believe has a very positive future) and Bitcoin (a cryptocurrency that we believe is firmly in the midst of the speculative bubble).
But the price movement of Bitcoin continues to confound. Bitcoin is an asset perhaps most similar to gold (a historic store of value) – as such it can and will be sustained indefinitely by a pool of willing buyers.
However, this ‘currency of the future’ (as heralded by the bulls) has a serious flaw. It is really, really volatile. One of the key attributes of successful currencies has been that they represent reasonable and stable value relative to goods and services. On a single day (22 December 2017), the currency managed to fall by a third, just to retrace all of its losses in less than 24 hours. Notwithstanding the fact that investors have earned outsized gains, this crazy volatility should raise serious doubts over Bitcoin’s adequacy as a currency.
LOOKING AT THE MARKETS
It may seem that someone forgot to tell the markets about the threat of nuclear war.
For the first year since records began, the S&P 500 scored a so-called ‘perfect’ calendar year – it delivered positive total returns (including dividends) every month of the past year. The Dow Jones Industrial Average, meanwhile, saw 70 fresh closing records in 2017, breaking a record dating back to 1896. The FTSE All-World Index advanced nearly 22% during 2017 and has now enjoyed its longest winning streak on record.
Confounding expectations, global bond markets also enjoyed a remarkable 2017. The Bloomberg Barclays Global Aggregate Bond Index returned more than 7%, its largest annual gain in a decade.
Flows into exchange-traded funds and index trackers hit record highs this year, significantly growing the share of savings assets that are now index linked. This indiscriminate inflow – at a time that the market grows increasingly expensive –seems absurd.
We have continually written about the risks of index-linked investing (which can never be ‘passive investing’; choosing an index is the ultimate active decision). It will be interesting to watch this investment trend unfold over the coming years.
Despite the increasingly exuberant market levels, we continue to caution that more muted investment returns are to be expected from all asset classes. This makes achieving savings goals far more challenging. As such I emphasise again that in a low return world, the additional, compounded benefit of alpha (excess returns) becomes ever more vital. These excess returns (net of fees) will be crucial to the total returns earned by investors.
Emotion and fear cause massive stock market price volatility and obvious mispricing seems increasingly obscured, given the complex world and pace of change we live in. The positive here is that markets have not become efficient. Skilled and diligent investors can still earn alpha through detailed analysis and unique insights. New opportunities emerge all the time, often a by-product of over-reaction, fear, greed and the short-term biases of many market participants. In this edition of Corospondent we highlight a number of these opportunities, including Alphabet and the UK retail property giant Hammerson.
OUR COMMITMENT TO YOU
At Coronation, we understand that it is a great privilege to be entrusted to manage your assets. We recognise and value your appreciation of, and alignment with, our long-term investment approach. Without that alignment, our job of creating long-term value for your portfolios would be near impossible. I therefore wish to extend my sincere gratitude for your loyalty and support over the years.
It is because of the trust you place in us that we tirelessly strive to improve and remain steadfast in our commitment to deliver investment excellence for our clients.