By David Crosoer and Prieur du Plessis
THIS TIME LAST year, we wrote about how difficult forecasting was and then proceeded to outline five possible investment trends for 2021.
Interestingly, we were confident that the pandemic would be controlled. In hindsight, this proved unduly optimistic, as was our view that global inflation was unlikely to become a significant issue.
The chart shows how Covid-19 cases have soared globally, while CPI (consumer price index) inflation has remained elevated across the 20 largest industrial economies.
In hindsight, these two wrong calls were related as successive Covid-19 waves and lockdowns skewed demand from services to durable goods, and severely disrupted global supply chains, leading to broad-based and substantial increases in prices.
We were on firmer ground in predicting that global growth would come back strongly.
In 2021, the global economy grew at its fastest pace since 2006, while our scepticism towards decisive climate action proved well-founded, with Cop26 not showing sufficient ambition and most economies and companies still falling far short of credible 2030 and 2050 targets.
Our final prediction, that the South African reform agenda could surprise on the upside, was, unfortunately, too optimistic, despite several opportunities for the Presidency to show intent, with the pace of change insufficient to meaningfully improve business confidence or lift our potential real growth rate above 1 percent a year.
So, where then do we stand today, and how should investors position themselves for 2022?
Given our previous unfounded optimism on global inflation, it would be churlish not to concede that persistently higher global inflation is not a significant tail risk, and that global supply chains might take longer to heal or a more virulent Covid-19 strain could disrupt them further.
Having said that, this scenario is not our base case, and we still think the global economy should put Covid-19 behind it this year, and supply-chain issues will eventually resolve themselves.
The big shift from where we were a year ago is that markets can no longer rely on a blank cheque from the US Federal Reserve to keep interest rates at extraordinary low levels.
But even so, we think monetary policy is likely to remain accommodative, despite the market now expecting multiple interest rate increases over the next two years.
Closer to home, the South African Reserve Bank has also started its tightening cycle, but again, from historically low-interest rate levels.
Even here, we think the tightening cycle shouldn’t be too punitive, given these low starting levels.
It would be fair to say that the market is not anticipating meaningful structural reform in South Africa or decisive climate change action globally, but there are tentative signs of positive momentum on both, and material changes could still occur.
At the very least, investors should not be blind to potential improvements taking place.
In the more immediate term, the big uncertainty remains global inflation and whether it could get much worse.
Investors should expect significant volatility from financial markets as they try to price in this risk.
As always, we remind investors to try to stick to their longer-term diversified plans, back their appointed managers to stick to their disciplined investment processes and benefit from the inevitable market mispricings that will arise.
Importantly, plans that do not rely on getting every call right, but deliberately diversify across strategies and managers, tend to do better when the future inevitably surprises.
David Crosoer and Professor Prieur du Plessis are chief investment officer of PPS Investments and chairperson of PPS Multi-Managers, respectively. Email: dcrosoer@pps.co.za
*The views expressed here are not necessarily those of IOL or of title sites.
BUSINESS REPORT ONLINE