The market recovery post-Covid gave investors two years of positive growth in equity markets. The JSE All Share growing by 78.13% from the lows of April 2020 to January 2022.
Since the beginning of 2022, there has been major concerns surrounding inflation. Some of the causes are over-stimulation and quantitative easing from central banks, higher commodity prices and high consumer spending.
To curb inflation, central banks increase interest rates. This dampens consumer spending and slows economic activity.
The South African Reserve Bank repurchase rate now stands at 6.25% and the SA prime rate at 9.75% after the recent increase. As a result, South Africa’s inflation rate has softened to 7.6% in September, down from a 13-year high of 7.8%.
These rate hikes directly affect the balance sheet of listed equities and the subsequent lower trading of their shares. Overall negative sentiment becomes a reality. For bank deposits, however, rate hikes has the opposite effect. As interest rates increase, the rate of interest received also increases.
What happened to the markets since January 2022 because of this inflation risk? The JSE All Share index is down by 10.06%.
In the greater scheme of things, these issues only pose a short-term risk. Your risk appetite and investment horizon will, however, dictate whether these type of risks fit in your portfolio or not.
If you take a look at the longer-term growth of risky assets like equities, the short-term volatility and overall sentiment changes to positive. The below graph illustrates this over a 20-year period.
Asset allocation built around investment horizons and sound financial planning is extremely important. This will also eliminate the emotional decision-making which can be detrimental to reaching your financial goals.
In conclusion, equities remain the best long-term fighter of inflation. Stick to your financial plan set out by your Wealth Manager.
Ruvan J Grobler RFP™