Lessons that hold true in an unstable world
Last year I turned 50. It is often a time for reflection. Can one still make sense of the world? Is what one believes still relevant? This is before 2025 challenged all of us in unexpected ways.
After all, it is no longer obvious that the human species will remain the pre-eminent intelligence on the planet (an assumption that has held for at least 300,000 years) or even what life (or companies) will thrive given global heating has exceeded the 1,5-degree pre-industrial threshold for the first time since the Eemian 125,000 years ago.
On top of this, the United States appears to be wrecking the global financial system it painstakingly built up since 1945; and in doing so undermining its credibility in times of financial (or military) stress.
So, what does this mean for long-term investors. The way we have started the year it seems these existential questions have been reduced to, we are not yet in an AI bubble (we can still party like it is 1999!) - climate risks can safely be ignored (unless you are a re-insurer); and Fed independence (and hence US credibility) has been preserved by last Sunday’s video from Jerome Powell.
Is this all wishful thinking? At the end of the day, I think it simply boils down to two questions. Do you want to take on investment risk? And if so, where do you want to take on investment risk?
At the start of my investment career financial markets were just a couple of months away from the piercing of the 2000 tech bubble, and just a couple of years away from a multi-year rotation away from US to emerging market (including South African) equity dominance.
Could we be in a similar place today? South African equities have just returned their best calendar year return in over twenty years, while the SARB announcement of a 3% inflation target has not been laughed out of the park. And international investors (including US investors!) are increasingly looking outside the US to diversify their US holdings.
So, it is not implausible that SA assets are due a continued re-rating. To make this long-lasting we would want to see SA real economic growth rate ramping up and debt-to-GDP ratio falling meaningfully. Back - of - the - envelope calculations call for 4% real growth rate and debt-to-GDP below 70%. This still looks very far away. And the obvious catalyst (the ANC is no longer the largest party in the GNU) is at best a coin toss as opposition parties continue to implode.
And what about the general environment. We are watching out for indications when we are past peak Trump. This could occur before the mid-terms if Republicans facing re-election force President Trump to dial back some of his disruptive policies. On balance, this should be positive for financial markets.
So, what lessons have I learned that may still be helpful today? Usually, if something is obvious, it is already priced in. Only tilt your portfolio to a particular outcome where you have strong evidence of your information advantage, and size it accordingly. And finally, don’t invest so cautiously that you end up worse off if the world turns out better than you expected.
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