Difference between good business and good investment



Investing in 2022 has not been for the faint of heart as investors have learned that in the current economic environment there is a significant difference between a good company and a good investment.

For 2023, the best advice is to expect the unexpected.

invest in 2022

Most of the world continues to face stubbornly high inflation, aggressive interest rate hikes and geopolitical tensions caused by the war in Ukraine.

“Some of these events were predictable, others maybe not so much. One thing is for sure, in 2022 investors have learned that it is entirely possible to lose money investing in good companies if they overpay,” says Adriaan Pask – CIO at PSG Wealth.

Stickier inflation

As 2022 began, most people were unsure where global interest rates were going, but the consensus was that they would rise, although very few expected rates to rise as much or as quickly as they did to have.

“Our view at the beginning of the year was that inflation would be much more persistent than expected at the time, and the corollary was that interest rates would surprise to the upside,” Pask said.

He explains: “When rates go up, valuations play a much bigger role. Growth comes into focus, recession fears develop and stock prices devalue in line with heightened risks in the macro environment.”

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Companies with high profit margins

So it was not surprising that the meters that came under pressure in 2022 were stocks with high duration and high growth, or stocks pricing in high levels of growth for a very long time.

According to Pask, these were typically technology companies with high profit margins.

“These companies were valued as if they would maintain those margins and growth rates for a very long time, and in recent months these companies have started selling. An important lesson here is that there is a significant difference between a good deal and a good investment.”

Pask points out that none of these tech companies are bad deals; they are not necessarily good investments in the current environment.

“There will certainly come a time when the environment will normalize and valuations for these meters will become attractive again.”

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inflation and rising interest rates

Persistent inflation and rising interest rates also made PSG wary of developed market bonds.

“We felt that even after the pandemic, the yields on these bonds were very low and essentially could only go up from there.”

As such, 2022 was very painful for investors as both developed market bonds and equities sold off sharply over the course of the year, subsequently causing the performance of offshore portfolios to suffer.

According to Pask, China was another major influence on the markets in 2022.

“China is a key consumer in the global environment and the health of China’s economy is important to commodity producers like South Africa.

“Despite slower growth out of China compared to what we’ve been used to over the past 20 years, it remains relatively high compared to the rest of the world. There are also existing constraints in the supply chain, this has been the main reason for the increased commodity prices, which has had a positive impact on South African capital, particularly our mining stocks.”

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invest in 2023?

Pask says PSG will keep a close eye on company margins: “We expected margins to decline as the cost of capital rises with rising interest rates, as sentiment will continue to turn against tach companies.

He adds, “We’ve already seen some of that take hold, but margins are still much higher than we expect in a recessionary environment.”

PSG believes that interest rates in the United States will peak next year and that this will lead to interesting investment opportunities.

It’s not clear if we’ve bottomed out yet, but we’re increasingly seeing quality companies trading at attractive ratings, he says.

“We also believe that more conservative asset classes will return to portfolios in 2023. In a higher interest rate environment, bonds and cash are once again playing a supportive role in a diversified portfolio, which will be positive for clients in these strategies. “

dollar weakness

According to Pask, another key theme for 2023 will also be dollar weakness and its impact on portfolios and asset classes.

“In our view, the dollar is unsustainably strong and could weaken in the near term. This leads to a stronger Rand and our South African-based bonds and companies will respond positively to this development.”

Pask says people need to be realistic about the uncertainty in the global political environment.

“You would be naïve to position a portfolio that is not exposed to political turmoil. I think politics will continue to have a big impact, especially in the short term where sentiment can affect asset prices.”

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