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Reflecting on the first six months of 2022

July 28, 2022

As I sit at my desk, contemplating what to address in the latest edition of the Chartered Employee Benefits X-Press newsletter, it is hard to comprehend that we are already halfway through the year. What a six months it has been, with numerous market and economic records being broken, unfortunately not in a good way. In many ways it has felt as uncertain and volatile as the first half of 2020, albeit for slightly different reasons.

February saw the start of the war between Russia and Ukraine, resulting in increased geopolitical tensions. With the war still ongoing, many European countries are left to make alternative plans for the supply of wheat and oil. This year has also brought a rapid increase in the price of oil and energy, which has exacerbated the already increasing inflation.

In an attempt to curb inflation, central banks around the world have hiked interest rates, some of which have been by record increments. We have not been left unscathed in South Africa, having experienced major volatility in our local markets and the Rand. We have also seen loadshedding escalate to new levels, further straining the economy. Believe it or not, our South African market has been somewhat more stable than other global markets, and the Rand’s depreciation has helped cushion some of the blow for local investors.

The result of all of this is that the first half of the year has been recorded as the worst return for global equities in history. To add to this, bonds, which normally experience positive returns in an equity market downturn, have experienced equity-like drawdowns, leaving us with nowhere to hide. With benefit statements currently being distributed, in both the second and third quarter, to all our clients and members, it will become apparent, in most cases, that the investment values are lower than at the same time last year. This will undoubtedly result in members questioning the ability of the investment managers as well as their emotions encouraging them to move away from equity investments into more conservative interest-bearing investments. We are aware of the stress and anxiety that this may cause; however, we urge members not to make irrational short-term investment decisions, which will negatively impact on longer-term returns. May I remind you that in March 2020, when Covid announced its presence worldwide, the investment markets dropped by 30%. Many people made immediate emotional decisions and changed their investment strategies. Three months later, by the end of June, the market had recovered the full 30%, prejudicing many members who had reacted hastily in March.

The reality is that we have been here before and will be here again. At all member education sessions, we constantly remind our members that investing is a marathon and not a sprint. Retirement savings are long-term savings and focusing on short-term volatility distracts from the long-term objective. It is critical that members stick to the investment strategies and remain invested in the market.

It is often during these uncertain times that it feels like this environment could last a very long time, or we tell ourselves that “this time is different”. However, the reality is that every market crash in history has been different, with a different catalyst, length in time, magnitude, and recovery period. In a bear market (when equity prices are declining), it feels like a lifetime, but markets spend far more time in a state of positive momentum than they do in a negative. The chart below depicts this well. The blue shading represents the periods over which the S&P 500 was in a bull market (when equity prices are rising), and the red shows the times during which it was in a bear market since 1956. The shaded parts are the periods during which we experienced a recession. You can see that the red portions are far shorter than the blue.

In closing, I recently read a great saying that “you cannot eliminate risk; you can only manage it”. While extremely simple in its meaning, it hits the nail on the head. Please rest assured that the Fund Investment Consultants are all focused on the long-term investment objectives to ensure they do the best for all the members during these uncertain times.

If you have any questions, please feel welcome to contact your Fund Consultant.

Source: Reporting from the Helm – July 2022

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