As we approach the second half of 2023, investors have not had a great start to the year even though markets have performed well thus far in 2023. With the S&P 500 up 14% year-to-date, the NASDAQ up 30% year-to-date, and the JSE All Share up nearly 6%, it is crucial to analyse the potential outcomes for the remainder of this year and beyond. This blog aims to shed light on the possible direction of global markets and offers insights for investors looking to make informed decisions about their money. Despite recent volatility and uncertain economic conditions, there are reasons to be cautiously optimistic about the future.
Global markets are likely to start rising strongly once inflation has peaked because it means interest rates will stop rising.
One crucial factor to consider when considering the direction of global markets is the impact of inflation. Historically, once inflation peaks and begins to decline, it generally signals a stabilisation in the economy. This stabilisation often leads to a reduction in interest rates, which can be a catalyst for market growth. Therefore, it is reasonable to anticipate that global markets will start to rise strongly once inflation reaches its peak.
The US market’s tendency to rise by more than 20% in 1 out of every 3 years.
While past performance does not guarantee future growth, historical patterns can provide valuable insights. Over the years, the US market has demonstrated its resilience and ability to deliver substantial gains. In fact, approximately one out of every three years, the US market has experienced growth exceeding 20%. The US market is important for Global investors as it tends to drive the performance of most other markets around the world. This means it is plausible for global markets to achieve significant gains in the foreseeable future.
Previous market downturns have often been followed by a jump of 9% on average for the next year.
During periods of prolonged market stagnation, it is crucial to maintain perspective and consider the potential for future rebounds. History shows that there is often a subsequent jump in the market’s performance after extended periods of market downturns or sideways movements. On average, this jump amounts to approximately 9% for the following year. Therefore, it is possible that we may witness a similar trend in the coming months.
Favourable valuations: JSE historic PE and SA bonds
Valuations provide investors with insights into the attractiveness of investment opportunities. In the case of the Johannesburg Stock Exchange (JSE), the historic price-to-earnings (PE) ratio over the last 20 years has been 15.8%; it is currently at 10.4%. This means that shares on the JSE are currently trading at lower valuations than their historical average, making them potentially attractive investments. Similarly, South African bonds are currently priced at their lowest levels in the last 20 years. This suggests that bonds offer an attractive opportunity for investors seeking relatively safe and stable returns.
The significance of a balanced portfolio during times of uncertainty
A balanced portfolio can provide stability and mitigate risks during periods of economic uncertainty and market volatility. The current environment, characterised by “doom and gloom,” creates an opportunity for investors to acquire assets at attractive prices. By diversifying investments across various asset classes such as shares, bonds, and cash, investors can manage risks effectively and potentially achieve positive returns over the long term. This is particularly relevant now as shares and bonds in South Africa are really quite cheap.
While the future direction of global markets cannot be predicted with any certainty, there are several factors that indicate a potential for market growth. As inflation peaks and interest rates stabilise, global markets may experience a strong upward trend. Historical patterns, such as the US market’s propensity for substantial gains and rebounds following prolonged downturns, provide further reasons for optimism. Additionally, favourable valuation metrics
In conclusion, while it’s tempting to follow the investment advice of fashionable friends or family members, it is crucial to exercise caution and consider the potential risks. Remember that your friends may not have done more research or possess more knowledge than you; their confidence may be misleading. Your circumstances and goals should guide your investment strategy, and decisions should be based on thorough analysis and professional advice when needed. By focusing on personalised strategies, diversification, and sound financial guidance, you can protect your investments and make informed choices for long-term financial success.
Written by Warren Ingram
CFP®, Wealth Manager, public speaker and author. Host of the HonestMoney podcast. FPI South Africa Financial Planner of the Year 2011.