Long-term Perspectives report highlights critical investment lessons brought to life by Covid-19
Published for the first time during a real-time economic crisis off the back of the Covid-19 pandemic, Old Mutual Investment Group’s (OMIG) Long-term Perspectives report, a collection of long-term market data, has highlighted three important lessons, which applied during the worst of the economic fallout of the Covid-19 pandemic in 2020: namely, the need to stay in the market and the high cost of missing out, the implications of being in cash over the longer-term and the need for active asset allocation.
The annual report tracks long-term data going back more than 90 years, which shows long-term market trends and asset class performance. Based on this research, the report lists key investment lessons gleaned from the data.
According to Graham Tucker, Portfolio Manager at OMIG and a co-author of the report, the report’s research shows that the market contraction experienced at the onset of the pandemic was the fastest on record, peak to trough, which may have spooked significant numbers of investors into exiting the market. “This is the first real crisis that we’ve lived through since the launch of the report eight years ago and, while in previous years we were theoretically trying to illustrate the key learnings it sets out based on history, this year we can really bring the lessons to life as they demonstrated their true value in 2020,” says Tucker. “At the forefront of these lessons, is just how acutely the Covid-19 pandemic drove home the high cost of missing out in the market.
“For example, if you had been in cash between December 2019 and March 2020, you might have gained 1.5%, compared the 36.6% decline experienced by SA equities over the same period. However, if you had stayed in cash for the 12 months until March 2021, you would have only gained 4.6% and missed out on the 67.6% delivered by local equities. This really drives home the need to ride out the storm and stay in the market, as historical trends show us that the bad times almost always precede the good times,” he says.
Urvesh Desai, another co-author of the report and a Portfolio Manager at OMIG, points out that one can also use the report and history to assess financial market trends going forward. “Considering the Covid-19 pandemic caused a coordinated halt to the global economy, it’s important to note that the mitigating actions taken to combat the effects of this recession were equally huge in scale,” he points out.
“If you look at US data, the debt generated in response to the Covid crisis is equivalent only to periods where the US has been in major wars. This trend of debt accumulation is a global phenomenon.,” adds Desai. “South Africa also shares an unsustainably high debt level”
The most palatable solution for governments to deal with high debt levels is by generating higher nominal growth – comprising inflation and real growth. Central banks have stated their plans to be much more tolerant of higher inflation as a means to tackle the need for growth. Globally, central banks have increased money supply substantially and this bodes well for higher nominal growth. However, Desai warns that this means we now find ourselves in a world where there is bias to have higher inflation over the next 10 years compared to the last 10 years. “One of the key lessons we have learnt through the research in Long-term Perspectives is that inflation is your enemy. Long-term savers can find protection in real assets that are linked to inflation and growth, usually equities, commodities and possibly property.”
The catch, however, is valuations, says Desai. “If you look at global equities based on a cyclically adjusted price-earnings ratio, US equities are looking expensive relative to history. While company earnings in the US are likely to go up in line with the country’s growth stimulus measures, rising inflation means that the earnings further out in the future will be worth less. Periods of higher nominal growth usually promote a rotation from growth companies (which produce more cashflows further out in the future) to value companies, and this is where we currently find ourselves.”
Desai points out that, in the South African context, the global low interest rate environment has bought us some time in terms of servicing our own debt burden. “How Government tackles this issue during this respite, will be key to whether we overcome our low growth and debt trap risks,” he says.
“From a valuations perspective, SA equities are definitely cheap relative to global equities. SA pessimism has proliferated, in part based on the past disappointing decade of mediocre earnings and growth. “However, barring potential policy tightening from China, a low-valuations starting point, coupled with low earnings, bodes well for future returns from here,” he concludes.