“Be greedy when others are fearful…”
Probably one of the most recognised quotes from Warren Buffett, the Chairman of Berkshire Hathaway. He is widely regarded as the best investor of our time with a long-term track record that has consistently beaten benchmarks and peers.
The quote, off course, refers to times when there is extreme bearishness or panic in markets (ie. fear). In such an instance you should have cash available so that you can deploy it into markets as this is typically a time where markets are cheaper, and your greed should take hold. What stands out in panic-stricken times is the ability of the Berkshire team (read Warren) to take sizable bets on companies that when markets calm down typically outperform.
Past examples of such periods are 2002 after the dot com bust, 2009 after the great financial crisis and in terms of industry specific events 2015 at the bottom of the mining sector correction. There are, off course, many such examples over the years and you need only be a patient allocator of capital to ensure that you stick to this mantra.
Fast forward to today and you hear many commentators squawk the extremities of data:
• Global inflation at 40-year highs,
• Commodity prices down more than 20%,
• S&P 500’s worst first half since 1970,
• Outlook for the SA economy is worst in 4 decades, and
• The first German trade deficit in 30 years, amongst others.
In this climate you can be forgiven for feeling bearish and you may be tempted to unload your investments as the pain endures. However, do this at your peril. According to Bloomberg, markets have always rebounded if the first half declined by more than 15% since the Great Depression. The average of such rebounds in the second half of a given year is 23.7%.
Howard Marks, also an investor of note and a pioneer of market cycles makes the point that as investors we must be second level thinkers. First level thinkers do what everyone else is doing and therefore perform as everyone else. Second level thinking is effectively saying yes this happened so what are the consequences or second round impacts. In Howard’s words, second level thinking is thinking that is “different and better”. In old school jargon you may call this contrarian thinking.
Our assessment now is that there is extreme bearishness in the market. Even crypto investors are starting to bail on their “sound” investment theses. This may not be completely unfounded as we have seen some crazy things happening in that space. Crypto.com buying the naming rights for the Staples Centre in Los Angeles for USD700m is one such example. Bank of America shares our sentiment with their Bull Bear Indicator currently signalling the most bearish picture currently in stock markets as a signal to take an opposite view. Thus, don’t panic and stay the course.
While we don’t entirely take the greedy view in an absolute sense, we do believe that there are opportunities to take more exposure in instruments that we have long been watching. We have also taken the last few months and expect to take the next month or so to further refine our research on our universe of stocks and perhaps add a few as there are some compelling valuations at this point.
If our assessment on extreme bearishness leading to a market rally is incorrect, we believe that our portfolios are equally well balanced to take inflation and recession into consideration. A good balance between companies with strong pricing power, brands and returns on equity coupled with businesses that can pass on inflation is what is preferred in our portfolios.
I’d like to refer to the performance of our funds for the first half of the year:
*Average of peer groups
The Arysteq Money Market Fund continues to be a top performing fund in the market and will benefit from the rate hikes during the year. I do want to caution though that this fund has a short-term focus and over the long-term tends to underperform inflation and growth assets. This is therefore not suitable for investors that want to maintain their purchasing power and grow their wealth.
The Arysteq Real Return and Balanced Funds underperformed their respective benchmarks but held up well in a market where stocks globally have returned as much as negative 30%. I maintain my view that the Arysteq Real Return Fund is our best product for investors that want to get the best of all worlds. It is well diversified in asset classes, geographies, and currencies.
It is however pleasing to note that our global fund has held up well. It has benefited from our quality stock selection with 37% of returns contributed by stock selection. As much as 63% of our returns year to date is due to the weakening ZAR during the year. The cherry on the cake is that we can now select more quality stocks at substantially cheaper levels, with some down more than 50%, but that continue to retain their quality status.
In conclusion, we view the market at this point as a place where astute clients/investors can increase their exposure to take advantage of this fearful market, our quality portfolio holdings, and the volatility of the ZAR.
Purvance Heuer
Managing Director
