The past two years have seen stellar returns from an almost forgotten source: local equities. Domestic equity returns were also strong in 2021/22 after the Covid lockdown slump, and our resources sector benefited from a boost in commodity prices.
More recently, global equities shrugged off the war raging in the Middle East to single-mindedly focus on the huge investment in infrastructure linked to AI in the US and the rest of the world. In fact, most of the gains we have witnessed on the US stock market have been driven by companies investing in AI, while the capital programme of a third of a trillion dollars has accounted for more than a third of US GDP growth this year.
If we go back to 2010 it was offshore assets that were in the pound seats. We would have to go back to the post-global financial crisis period of 2010-11 to find a period where local equities delivered annual returns comparable to global asset classes.
Over the 2010-26 period we witnessed our gross debt to GDP rise from 31% to just under 79%. Inflation was also higher than our trading partners’, fluctuating at 4%-6% per annum.
Our state-owned enterprises went through a period of mismanagement, which culminated in their inability to deliver basic services across the electricity, water and logistics sectors.
Low economic growth meant the economy was unable to absorb excess labour supply, with unemployment ballooning from 25% to 32%.
As with investments, football teams can spend a long time in the wilderness before clinching glory. When Arsene Wenger’s Arsenal went through the whole of the 2003/04 season unbeaten, it achieved a feat no-one had dreamt possible. And few would have imagined it would take another 22 years for the Gunners to win the English Premier League trophy again.
Mikel Arteta took over in December 2019, while Arsenal was languishing in 10th place in the league. Arsenal had not qualified for the Champions League for three seasons, and it would be another three seasons in the doldrums before Arteta got the team into Europe’s elite competition.
It was also in his first year that Arteta pleaded with Arsenal fans to “trust the process” on his way to winning his first trophy, the FA Cup.
Going back to investment processes, the drivers of global equity markets over the past few years have been concentrated among the hyperscalers ― large tech companies. But even these companies are about to see their dominant positions on global exchanges challenged by new listings, with SpaceX and Anthropic planning to come to market at expected dollar valuations in the hundreds of billions of dollars.
In case you’re wondering, Open AI (ChatGPT’s developer) has yet to file for listing. What is more astounding is how index providers such as Nasdaq or Russell are proposing new rules to allow these jumbo companies with free floats of less than 10% of their shares to enter the index at five times the market value of the shares available to trade.
In addition, these newly listed giants will be allowed to be included within major indices within five days of listing, as opposed to three to 12 months for traditional indices such as the S&P 500. Index funds will therefore have no choice but to buy into these new listings.
What is more astounding is how index providers such as Nasdaq or Russell are proposing new rules to allow these jumbo companies with free floats of less than 10% of their shares to enter the index at five times the market value of the shares available to trade.
In the football world there is a similar adulation for the giants of the game and this is matched by their annual revenue. While a huge cheque book does help in the transfer market, the key to success remains a manager and coaching team who can deliver trophies.
Owners are ruthless in replacing managers who don’t deliver success, as Liverpool, Manchester United, Tottenham Hotspur and Chelsea experienced this year, while Manchester City are seeing their legendary manager Pep Guardiola deciding to step out of the limelight.
Unlike football clubs, where changing managers is not unusual, doing this is trickier when it comes to central banks. The attack on former Federal Reserve chair Jerome Powell by US President Donald Trump to force him to cut rates was something America last saw in the 1970s in the wake of another oil shock.
New Fed chair Kevin Warsh faces a balancing act, with headline inflation in the US at five-year highs. He also believes frequent speeches by Fed members have made markets overly dependent on the Fed’s forward guidance in the past. Therefore, we should brace for more volatility and surprises from Fed meetings.
Bafana Bafana will be competing in the Fifa World Cup later this week for the first time since hosting the event on home soil in 2010. Like Arsenal fans it has been a long wait for local football fans.
When it comes to our debt, it’s been almost six years since we were downgraded to junk status. However, there is light at the end of the tunnel with Moodys changing its outlook last month from stable to positive, citing progress on structural reforms.
If the National Treasury continue to deliver on the objective of fiscal consolidation we should see an upgrade to our sovereign rating next year.
Trust the process!
• Rassou is chief investment officer at Ashburton Investments (and an Arsenal fan).
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