Reflections from South Africa: Managing assets and emotions in volatile times
Please note: Unless otherwise stated, forecasts are correct at the time of writing, 23 May 2022.
As part of our enduring commitment to South Africa, and following the announcement of a three-year patron partnership with the South African Chamber of Commerce, we were proud to host a series of events in Cape Town, Durban, and Johannesburg.
Here, we summarise the main insights, both for the global economy and for South Africa. The events were chaired by Melanie Aimer, Head of Barclays International Bank (and herself a proud South African), and our keynote speakers were Market Strategist Henk Potts, and our Head of Behavioural Finance, Alex Joshi.
The global economy: a perfect storm
Henk Potts took attendees on a whistle-stop tour of financial markets, reflecting on the impact of the war in Ukraine, the threat of escalating post-lockdown inflation, and the outlook for key economies, including South Africa.
“Russia’s decision to invade Ukraine sent a shockwave through the global economy,” he said. “It is being described as the biggest security issue Europe has faced since World War Two.”
As evidence of what he described as a “perfect storm”, Henk pointed to China’s heightened COVID-19 restrictions, surging price pressures, and the tightening of financial conditions following interest hikes from the major central banks. Each of these factors has led to global economists to downgrading growth forecasts for the second half of 2022 and in 2023, he said.
Reasons for optimism?
Despite the apparent doom and gloom, Henk was keen to point out reasons for optimism if we step back from the noise of day-to-day volatility. The Investment Strategy team at Barclays Private Bank, for instance, is forecasting global growth of 3.2% for this year.
Although this is a noticeable downgrade from our previous estimate of 4.4%, it does still suggest trend growth for the rest of the year, and it remains above the 2.7% annual growth that was achieved between 2000 and 2019. Inflation is also expected to moderate by the end of the year, with price pressures easing back to averaging 3.2% in 2023. Needless-to-say, nothing is guaranteed and time will tell how those forecasts materialise.
The first-quarter earnings season in the US – the world’s biggest and most influential economy – also brought encouraging news, as 77% of the S&P’s reporting companies outperformed expectations, posting numbers above the 10-year average1. Meanwhile, Henk noted that solid labour markets, excess consumer savings, and the recovery in the service sectors were positive signs.
South Africa in the spotlight
Turning his attention to South Africa, Henk explored the domestic outlook for the remainder of 2022 and into 2023. He pointed to moderate growth prospects being underpinned by high exporting and commodity prices.
Looking at inflation, economists expect that levels will peak at around 6.3% in June2, before easing to below 5% at the end of the year . Nevertheless, Henk did point to some weaknesses in underlying indicators, such as a contraction in retail sales, additional pressure on manufacturing output, and the impact of flooding in Durban on supply chains. He also noted that the South African Reserve Bank had reduced its growth forecast for 2022 from 2% to 1.7% the previous week3.
“The structural challenges South Africa is facing are about trying to promote viable investment,” he said. “Improving infrastructure, reducing the inefficiencies we see in some state-owned companies, and adapting the education system to meet some of the new challenges as the economy continues to evolve, are vital.”
The psychology of investment decision-making
Our second keynote speaker, Behavioural Finance Specialist Alex Joshi, addressed the psychological, social, cognitive, and emotional factors that underpin investor decision-making, with a particular focus on times of uncertainty, such as those we are currently experiencing.
“Behavioural finance gives us a better understanding of how investors think, feel, and act, and we can then use these insights to achieve potentially better investment outcomes,” he said. “It helps us to be more comfortable with the investment journey and to overcome some of the behavioural challenges of investing, which can drag on investment returns.”
Alex explained the powerful psychological impact of losses, which make market volatility particularly challenging for investors. They induce actions that provide short-term comfort, such as reducing investment exposure and holding cash, but can affect the ability to achieve long-term goals of protecting and growing wealth. “The data shows that volatility won’t prevent investors from reaching their goals, if they can see it through. Time in the market matters more than market timing, which can be risky”. Alex suggested ways to make it easier to do so, such as keeping focused on long-term goals and slowing down decision-making with a series of reflective questions.
The lure of the familiar
Addressing South Africa’s geographical distance from other financial hubs, Alex explored the preference many investors demonstrate toward the familiar. As we believe we better understand companies from our local markets, such investments can provide a psychological sense of reassurance and we perceive them as less risky.
But, while understandable from a cognitive perspective, this so-called ‘home bias’ can lead us to overweight (holdings) in a particular region, sector, or company. As a result, investors are actually increasing the risk in their portfolios by not adequately diversifying. Diversification also has an often overlooked benefit of shielding an investor from the emotions that volatility in a portfolio can induce.
Shorter news cycles equal shorter investment horizons
“It is important to recognise the extent to which our emotional responses are influenced by news coverage in the media”, Alex said. As an example, he pointed to the live updates we received during the COVID-19 pandemic, and how these conditioned us into adopting a more short-term mindset.
“Decades ago, we would get the newspaper once a day,” he said. “Now we have the internet, articles are updated multiple times a day. Then in times of crisis, we have live updates. During the pandemic, one of my PC screens was a live COVID-19 update. Every two or three minutes, there would be another ping of anxiety. These things shorten our emotional timeline, and our perception of the riskiness of investing rises.”
To overcome this, it can be helpful to step back from the noise of 24/7 news coverage and focus on a particular news story – and then reflect on whether, and to what extent, this incident has a material impact on your own individual portfolio. “Remember your own well-diversified portfolio is not ‘the market’.”
Moreover, it is important to remember that investment horizons tend to be far longer than our emotional timelines, and the financial markets have historically been robust enough to ride out immediate shocks.