Taking stock: Getting through the 'back to normal' 2022 investment maze will be difficult and complex

For the economy and stock market, 2022 will be about a return to normal. 

Economic growth in countries around the world (including South Africa) will ease. Central banks will resume interest rate hikes and begin to withdraw the extraordinary measures taken to support economies through the pandemic.  

Investment returns will moderate as the rip-roaring stock market rallies, powered by the reopening of economies under eased Covid-19 lockdown measures, will soon become history. 

In 2021, South African stocks closed out their best year since 2009. The JSE All Share Index, which comprises the largest companies on the local stock market, was up 24.1% in 2021 – in line with US markets (the S&P 500 finished 27% higher).

South Africa’s stock market (worth more than R14-trillion) outperformed other emerging markets, which were up 14% (as seen in the performance of the MSCI Emerging Markets EMEA Index, which includes stocks from 12 emerging market regions, including parts of Europe, the Middle East and the rest of Africa). 

The JSE has largely benefitted from global developments in recent months and its performance is not a reflection of local developments such as SA’s weak economic and fiscal outlook. The dominance of Europe-listed stocks such as Richemont (luxury goods), Naspers (media and technology) and Prosus (technology investor) on the JSE – companies that were among the best performers in 2021 – helped boost the local stock market.

South Africa, an emerging market, has largely benefitted from the increased demand for its commodities, optimism about the global rebound from the pandemic, and measures taken by central banks to not let economies in lockdown and major corporations fall apart. This resulted in trillions of dollars being pumped into economies, to the benefit of emerging markets.  

Outlook for 2022

The overriding message from market-watchers Business Maverick spoke to is that economic conditions and corporate earnings still look good, as rising Covid-19 vaccination rates are helping governments to be better equipped to deal with the pandemic, instead of relying on crippling lockdown measures. 

One topic will dominate in 2022 and will also be the main factor for the JSE’s performance: the pace of consumer inflation around the world. 

Inflation has been rising due to strong consumer demand for goods in a post-hard lockdown world, continuing supply chain troubles and the emergence of Covid-19 variants.  

Central banks, which are tasked with keeping prices of goods and services stable, tend to raise interest rates to tame inflation and stop the economy from overheating. Higher inflation is usually regarded as a negative for stocks because it erodes wealth, increases borrowing costs, increases input costs (materials, labour) and reduces standards of living.

Although there are inflation risks in 2022, Ron Klipin, senior portfolio manager at Cratos Capital, doesn’t expect the threat of inflation to cause a stock market/JSE meltdown. 

“There will be many challenges in the year ahead. But corporate America is still doing well. There will be the withdrawal of stimulus by the US central bank and less buying activity in the bond market. But there will be some liquidity in the market for at least another six months,” said Klipin. 

Put differently, there might still be higher trading activity in the stock market for some time. 

For Wayne McCurrie, senior portfolio manager at FNB Wealth and Investments, inflation concerns are mostly in the US and not SA. McCurrie said inflation in SA remains well controlled and within the Reserve Bank’s 3% to 6% target range. 

“The real concern is inflation in the US. If it stays above 4%, the equity [share] market will be clobbered. If it goes down to below 2%, the market might just be fine.”

Picking shares

Stock-picking in this environment becomes incredibly difficult and complex. 

McCurrie prefers value shares – which appear to be undervalued in the marketplace or have a low valuation – over growth shares, which offer strong earnings growth and have the potential to outperform the market over time. McCurrie is backing banking shares on the JSE, which “look cheap even though they have gone up in 2021”. 

Cratos Capital’s Klipin has been a big supporter of offshore stocks in recent years, backing a group of US technology stocks including Apple, Meta (previously known as Facebook), Microsoft, Amazon, Netflix and Alphabet. 

These are rand-hedge stocks with foreign currency earnings and dividends, which offer investors protection from currency induced tail risk. 

But Klipin is now backing stocks that have some exposure to the South African economy, including AVI, Bidvest, Mondi, Anglo American, Shoprite and Richemont, saying these companies have “good management teams and strong cash flow”. DM/BM