It’s been a tough time for investors, especially South Africans. Portfolio values have barely kept pace with inflation for a while now. More recently, we have seen declines in most portfolios. We are all looking for reasons. The slowdown in the global economy, China’s lacklustre economic performance since the pandemic, the war in Ukraine and Gaza, and local political uncertainty have probably all contributed to the negative sentiment.
What is easily missed though, is that there’s been a strong headwind for nearly three years now: rising long-term interest rates (bond rates) in the world’s most important economies. If US long-term interest rates remain at the current levels, 2023 will be the third consecutive year of rising rates and, consequently, declining values for bond investors. It will be the first time in history that US bonds will have shown negative returns for three consecutive years.
Early on in my career, a seasoned investment strategist taught me that the US long-term interest rate was the single most important indicator in the investment world. We calculate nearly all other asset values using this rate as an anchor - there is a negative relationship between this rate and other asset values. The higher the long-term interest rate, the lower most other asset values will be.
It is then no wonder that we’ve seen such lacklustre returns in nearly every asset class over the past three years.
We should also remind ourselves that long-term interest rates were barely positive a few years ago in most developed economies. These low rates may have been set to encourage borrowing and stimulate economic growth, but we suspected such levels were not sustainable. We also speculated that inflation would return, and by implication, that rates would have to rise. Yet, the rapid rise, especially this year, has still been uncomfortable.
It is never easy to see negative short-term returns. However, understanding the context may help us to stay the course. Right now, our portfolios can be likened to a small boat in the open ocean, battling to move forward because of this unusually strong headwind.
If your portfolio is not providing satisfactory returns now, you are not alone. Most aren’t. It is now important to check on the quality of your portfolio, and the levels of diversification, and then to wait for the wind to die down. These unusual circumstances are unlikely to continue indefinitely. The wind direction will change again, and we must make sure that we are still on board that boat!
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