Welcome to the first episode of 2023 of Honest Money. It's, it's been a heck of a year, 2022. And, and I thought, you know, be, before we kind of get into the detail of the Honest Money Life our first episode really should be about. Little bit about what happened in 2022 and, and wrap it up so that we can give ourselves a really nice foundation to look ahead as well into what, what do we think about 2023? And, and for an episode like that I'm, I'm always gonna need some backups.
I brought in the heavy artillery so Rupert hair head of multi-asset at Prescient Investment Management. Thanks very much for joining us again and being brave enough to take on such a big topic. It's a pleasure as always. So Rupert, maybe just you know, if we look at 2022, what were kind of maybe the main it's hard to say highlights, but, but main talking points about 2022 and maybe how those will inform us for, for the, for the year ahead.
Yeah, so what I love to do at the start of every new year is I go back and I actually read the letters or the letters to clients that I wrote. And it's quite a good exercise to go back and say, okay, what was I thinking? Or what were we thinking as a house in January last year, February? you know, June, July. And it really is an eyeopener when you, when you see what you wrote and where it actually came to fruition. I'm not gonna say that it always come to fruition.
I'd love to have a crystal ball where I can tell you exactly what happens in the future. I think by, if, if that was true, I'd probably be a billionaire by now, But some things did come right. And then as always, there are things which you cannot expect, and that's something that we've come to know so well in investments and in and in the world as. So, I mean, looking back in 2022, we started out with the, the Omicron variant in, in, in Covid, right.
And there was a, a sharp spike in infection rates in South Africa. We were still in that whole covid scenario. Everyone was a bit cautious. But Omicron actually came out as being a very mild version of Covid. It was very infectious. It went through South Africa like a wave, and we got out the other side. Basically having come out, I mean, touch wood from the whole covid scenario with no masks, with life, back to normal things were settling down.
This after a year, just in terms of the investment markets, 2021, where a stellar year for equities. So we had 30% run in South African equities almost a 40% rebound in the s and p in the United States. So things were looking up. Everyone was in quite a good mood. And then of course, our good friend. Mr. Vladimir Putin came in and conducted what he then called a special military exercise in the Ukraine, and things went pear shaped.
That was very important for the year because of the whole inflation scenario. And we've talked about inflation in another podcast, but we were experiencing extremely high levels of inflation in 2021, and the thought process was at the start of 2022. Inflation had peaked, inflation was gonna come right back down and things were gonna get back to normal.
And what that means for the end investor, very importantly, is that rates, in other words, the sob the repo rate on, on your, your home loan the expectations were that that was gonna come in. What happened was with the invasion of the Ukraine, we had a commodity crisis. So the price of oil, the price of natural. Shot through the roof. And what that means is that from a supply side on inflation prices have to go up.
And we experienced that more and more so in South Africa throughout the year as an importer of mainly oil products. And we all know at the pump it, it hit above 26 rand for diesel. I have a diesel car, unfortunately, and I had to think twice about going on holiday to to further destinations last. We, we were all under the pump. I think with that that, that rising price and, and, and food just getting much more expensive as well.
It became a almost a little, not a, a crisis necessarily, but a cost of living pressure that we felt maybe not as bad as, as the developed world. Maybe not as bad as they felt in, in Europe and the us. Yeah, no, exactly. So we had a year, which was actually one of the largest dislocations. Equity markets, so stocks and shares in history between South Africa and the rest of the world. So South Africa finished the year up around 5%.
Coming into the year end on the all share index, global equity markets finished the year down around 20%. So a massive dislocate dislocation South Africa largely spared from the mass SalesLoft. two reasons. One being that we are largely resource producers and that's not oil, that's, that's basic materials like iron ore, et cetera. Of which we are an exporter. So we benefited quite a lot or certain companies in South Africa benefited from the bla in natural resource prices.
And it provided quite a good hedge for, for the, the year of 2020. and and I guess also that, that we weren't, we didn't start the year as an enormously expensive market with lots and lots of overvalued companies exposed to major valuation risk. We, we were already not that we weren't expensive. I mean, we might not have been super cheap.
Yeah. Spot on and, and I'll get to that I think in, in a couple minutes time when we talk about this year, but last year coming into the year on valuations alone, South Africa looked pretty. And we as a house, we had quite a, an overweight view on South Africa as did many of our peers. What was interesting though is that in the, the context of what happened last year in the global selloff, global equity markets were extremely expensive.
Now if you look at that on the, the, the age old classic metric of the PE ratio, simply the earnings that you're getting out of companies at the current level of price the PE ratio, you're looking for a low PE ratio, which implies that you're getting quite a good bang for your buck. The United States was sitting at a PE ratio, a as a whole, on average about 30 times. which means in simple terms, it takes you 30 years to get paid back your investment via earnings.
South Africa came into the year at around 10 times. At, at the end of the year and we'll get to this now, is, is at the end of the year. South Africa actually finished at around 10 times, so things are still looking quite attractive. global markets having sold down 20% have actually approached what we would deem fair value. Not a good, necessarily a wild buy, but it is more of a fair value opportunity than it was a year ago.
So not on the edge of the precipice, not quite as worrying from a valuations perspective for global. So maybe just ki kind of some of my own thoughts. Also, just around 2022 was we, we, we were, you know, sitting throughout that year some of us worried about what would happen at the n c Elective Conference. You, you know, for. For investors. I always think about Warren Buffett saying, you know, he doesn't pay any attention to who the President of America is.
And he doesn't get into speculation about about politics because it doesn't change his investment case. And, and I, I don't always think that's the case for a smaller country like ours. Politics always plays a role, so it's something that I would focus on a bit and, and looking at last year. You know, the, the, the thing we were hoping for, I was hoping for, was a bit of continuity in, in other words, we didn't get to the NC elective conference.
Sirrel you know, SoPo gets kicked out of the job and a new wave of of NC politicians come into par. We get a new state president and a new deputy president and, and, Perhaps a change in economic policy.
So, so for me I, I'm rather relieved that that it seems to me maybe even a little bit of a reinforcement of what happened in the previous a n c elective conference where, where Rama Poer was initially elected as, as president of a n c. And, and my own reading of this, and I'm no one's political analyst, is that the, the kind of transformation. Of the ANC or the reform, I think they call it, the reform agenda within the ANC has, has strengthened somewhat.
And, and that can only be good because there isn't there isn't a business person in South Africa investor in South Africa that, that believes things are going well. What, what we want is these reforms to carry on.
And, and if anything, we're all begging for them to accelerate and, and so, If the reform agenda has, and the reform grouping within the s c has, has had their hand strengthened, let's hope that that, that means we start 2023 with, with a, a, a potentially stronger kind of more business and job friendly, a agenda rather than ideological. And that's really I'm not putting words into Rupert's mouth. That's my hope is that we. We move away from ideology to very practical business implementation.
How do we keep the power on? Because you know, we, we, we, one of the things that happened last year was a record we don't want, which is the most number of days and hours of, of load shedding. And, and I, I just don't feel that's going to change for this year. So, so I think Escom is a big point on our agenda for the next, for 2023 and 2024. But, but hopefully that we get some political stability. You know, at the time of recording, there is no change in the cabinet.
And, and who's going to take respon responsibility for moving our country forward alongside the president. But, but let's hope that that, that there are some shakeups there as well. Again, my, my view, the, the honest many view. And, and so I think uh, globally, just looking at the politics there interesting to see the, the rapid change in leadership within the uk.
I think that was a a very interesting to watch, you know, one, one of the world's oldest democracies you, you know, acting very much like a teenage democra and, and President and finance minister taking their entire country to the brink of, of, of collapse and then back again when they, when they leave their jobs.
And, and that's something that you know, you would just not have imagined, you know, talking about things we can't imagine, not something one would've imagined happening in such an old democracy with so many checks and balances. And, and just to show you that actually all political systems have vulnerabilities no matter what they are. And then I think. Sorry.
Re and then my last thing around the, the Ukraine I'm gonna call it war and invasion, by, by by Russia, is, it's an incredible humanitarian crisis. It's an incredible kind of collapse of, of, of the world systems of trying to keep peace. You know, the, the war to end All Wars is, is a stupid phrase because no wars ever ended. Any other wars and, and so what, what was important about that from an investment point of view? Was the way that finance got weaponized.
So, so I, I mean, we, we've all had sanctions in our lives for many decades around the world, and it's, it's a tool that's been used, but it's never been used in, in the way that finance was used as a weapon where, where Russia was effectively almost immediately and overnight you know, isolated from many financial systems, the ability to trans transact online and digital movement of money just got Kind of imploded.
One of the things that happened right at the end of 2022, I think it was around about the 2020 2nd of December, was that the, the companies that track in indices on the Russian stock market stopped tracking the, the in the index on the Russian market. Part of that was because of these financial sanctions, but, but the other part of it was the Russian response, which. They effectively nationalized the assets of investors that had gone into those indices.
And, and certainly I saw that you know, I had a, a very small exposure to a Russian E t f and, and that money's gone. The Russians have taken it. And, and, and if, if that happened to me on a very small scale, it must have happened to many other people with many billions of dollars around the world. And, and to me that's a major new scary development in the world of.
Yeah, I mean there was a, there was a couple of S managers in South Africa had exposure there, and literally, as you say, overnight, the exposure of those S managers was written down to zero. As a caution, but it's actually proved to be true, as you say, essentially, essentially a nationalization of all stocks. So you know, it just, it just says to you, diversify your mix of asset classes.
I mean, imagine Warren, if you'd had, if you'd said, Russia's the next best thing and you've had a hundred percent of your, of your portfolio in Russia. The other thing, just on a couple of points on what you said there, going back to South Africa, just quite an interesting scenario when we went through that whole. Possible. Father, follow a scenario for president Ramer. In the bonds market, we had the sharpest selloff in the bonds market.
Well, the third sharpest selloff in the bonds market in history in one day. So, so in other words, what happened was the perception of risk in South Africa was so sharply heightened, behi by the, the possibility that there could be a change in presidency towards perhaps a more left with leaning presidency, a left with leaning cabinet. So, so very much a risk which was avoided, touch wood.
And as you say, we've been through now the elective conference and it seems like there's, for now at least stability in the presidency. So we go into this new year with a little bit of a little bit of, let's call it a little bit more certainty at home. And the theme last year, I had quite a few chuckles last year.
Just, I mean, excluding the end of the year sort of President Ram Saga, we were quite a stable political country, and I know, as you say, Warren Buffet says he doesn't take into account the president of the United States. But I can tell you, I think when, when Donald Trump was president. He probably sat up and took notice. And I say that because there's another US election coming up, and they went through not a, a presidential election, but the other pillars of government last month.
And the Democrats survived. but the presidential election is the next big thing. And who knows? Mr. Trump might just come back as president. And as you say, on a relative basis, that makes us look like quite a stable country. So that's something to watch out for. The one thing about Mr. Trump as president is, is actually it was, we saw last time quite pro growth. So for an investor, it's not the most terrible of things.
Yeah. It's one of those things where, where your morals are offended and your, your bank balance is rewarded. It a, a lousy situation to be in as a, as a human being. So, so, so Rupert, maybe that's a very nice point to look at at 2023 and, and just some, some thoughts about, about the year ahead. Right. So we've all, as I said, felt the rate hikes that we've seen mainly for those who have home. but what's priced in for the year ahead is essentially a flattening of those rate hikes.
So no more rate hikes, possibility of even some cuts coming through, which is great news for the consumer in South Africa. What generally happens is that the central or the Saab the SA Reserve bank tends to mirror the Federal Reserve Bank. So if the Fed in the United States hikes rates, the SARB generally hikes rates as do other central. in line, and that's what we've had to do over the last year or so because of one thing being inflation in South Africa, but the other one, the devaluing around.
So what we are seeing now is the possibility of a stabilization and monetary policy, which is great for the end consumer because it means there's a lot more certainty we're seeing inflation coming down. It's come down significantly in the United States. It's started to come down in South Africa, which means that for the end consumer again, Prices potentially, I wouldn't say get cheaper, but they at least stabilize.
So you get a lot more certainty and it means that your salary isn't lagging your grocery trolley. Which is a big problem I think all of us had last year. Yeah. We're also seeing from inflationary side, we're seeing the supply side inputs of oil prices, gas prices, normalizing if not coming in, and an interesting one on Ukrainian situation and Russia.
What I've seen over the last year is, The short term impacts of things like you know, an embargo on all financial transactions in, in, in, in Russia certainly is a, a good weapon or proved to be quite a good weapon. But what happens and, and Russia retried with, with a you know, cutting off of oil and gas supplies to towards Western Europe. What happens though is that the world just the chess pieces re. So now in, in Western Europe, they've now switched to a bit more renewable energy.
They've switched on a couple more uh, switched back on some of the nuclear power plants and they've looked elsewhere for gas supplies. Russia's done exactly the same thing. A lot of their financial systems are now internal to Russia and, and, and the effect of those initial those initial embargo in Russia aren't necessarily as strong as they were at at. So, so a changing world. I think that touch wood, it is a stabilizing world.
As I said last year, you know, we always say this, but we have to be conscious of what always happens with a degree of certainty is things that we completely uncertain about. Yeah. So that's something that we know is gonna come on. I can't tell you what it's gonna be, but every year there's gonna be something, at least one thing, if not more. So we try and prepare ourselves for that in the best way. I, I think it's such a valid point.
You know, I mean, we've got you know, billions of dollars being spent around the world every single year trying to anticipate weather patterns. And, and, and anyone that's looked at their weather app you know, especially if you look at the Cape you, you'll know that a weather app. Might, might not be re reliable for the next two hours and forget about the next 365 days. And I would argue that weather is, you know, has a lot fewer factors, for example, than investment markets.
So, so it, it is certainly a, a really valid point to say, you know, it's important. That you look ahead and it's important that you position yourself potentially for a direction o of the world to go, but, but equally that you are so well spread and diversified that you can tolerate many new different shocks. Because the, the one thing I would say as an investor is we need to be always humble enough to say we might have experienced, we might have knowledge, we might.
I mean, I'm saying it so carefully, it's some expertise in the investment world. But, but what we absolutely know is we can always be wrong. And, and, and diversification is the only antidote to being, to being wrong. And, and so I mean, I, I like your point. I think it's important for people.
Don't, you know, you know, when we're sitting here at the start of the year, don't be so pessimistic because you're sitting with stage four, five or six load shedding and you, you know, think the South African economy can only go in one direction and therefore investments can only go down. Because there are also positive shocks that can happen and they're also good things that could, could, could change investors' views even if the economy is struggling.
So whatever it is, whatever your basic view is as an investor, Just be careful that that the opposite can happen and you haven't set all your, your eggs in the, in the wrong basket. And, and so, you know, by all means have a view. But, but, but but, but make sure you've got other views that, that, that cater or other eggs in other baskets to cater for those different views that you don't have. And also I'd say don't be sticky in your view. You know, don't be shy to say, okay, I was wrong.
I'm gonna update my view. For instance, if you, I mean, this is something I did about 10 years ago. I was quite bullish on, on resource stocks in the platinum sector. And then out of the left tail, as we call it. So completely unexpected risks. There's a strike in the platinum sector. Now. I can't, I can't anticipate that, at least not far in. And it's something that you, you, you can then say, okay, I'm gonna cut my losses. I'm gonna look for another opportunity in investments.
So yes, diversify, but also don't be, be humble enough to say, okay, this, this, I'm not gonna wait 10 years for this investment thesis to play out. So, so Rupert I'm, I'm looking at my producers ma ma making big eyes at me. I think we're, we're hitting our time limit, so I wanted to just give you the opportunity to, to kind of make any other points about 23, 20 23 before, before we.
Yeah, I think as you say, we've got some interesting scenarios ahead For Escom, it's a lot of uncertainty onshore. So stage six load shedding, we are seeing it in our own office here. We're running our generators for many, many hours a day, left on very, very expensive fuel. So we are seeing a shift in South Africa society. We're seeing a shift towards a lot more clean energy, which is for the. Off the public sector onto clean energy projects. So very interesting investment opportunities there.
And I think, you know, we, we've been through a lot of things before as South Africans. We're quite hardy people. I think no matter what happens, we'll survive it. So we'll catch up at the end of 2023 and see if any of us that we've said was, was fat or what was. We got to the other side and, and I think it was a point you made a bit earlier, so I'd just like to emphasize that as well.
As we, we are starting the year with valuations of the South African stock market being very good, being, being certainly quite far below their long-term average valuations, which means to me it's kind of saying, There should be a flashing red light around all share prices saying Black Friday is now. So, so you should not necessarily be a seller of South African shares if you've got a long-term view.
And, and equally that you know, the world markets might not be at their lowest valuations ever, but, but there are certainly low and, and, and offering good value so, So, you know, with uncertainty you know, it's unsettling on a human level, but actually as an investor for the next decade, you want uncertainty and you want people around you to be afraid because that's the time you get the discounts on great investments. So, so your honest money tip of the year is those discounts are now.
Please buy shares. Shares are a good thing to own. They're the productive assets. They're the things that will help you get to your financial freedom as fast as reasonably possible. And, and, and don't be too swayed by bad news. There's lots of bad news news already in the prices of all of our investments both in ESSA and and around the world. So we need a lot more. Different bad news to drop prices really substantially for the next decade.
And, and, and I'm not making a prediction, but but, but history tends to show us that when we buy shares at these kinds of valuations, we well rewarded. So, so stay focused, stay on the long term. Don't worry too much about about prices going up and down. You know, the fund managers call it volatility. Volatility is just a good excuse to buy when you've got cash.
And, and then to Rupert's point about high interest rates I'm sure I'm gonna say it many times in, in, in podcasts ahead, but high interest rates mean you need to get your debts especially credit cards, personal loans, overdrafts, pay those down as fast as possible and then try and pay off your other debts as well. But but don't be shy to invest this year. This is, you will not regret buying broadly diversified investments a a around the world. Now, th this is the time to buy.
And I'm happy that we can look back at at the end of the Air Rupert and see, see how good or bad that that was. It's not a prediction, but I, but I, I'm confident that's a good call to make. As you say, Warren, even, even if it's at the end of the year, you've had a bit of a knock. It's an incredible opportunity right now at current levels if you're a long-term investor to start getting involved. And I've said this before, but don't be afraid to average into an investment.
You know, if it's a monthly contribution, in times like this, when there is a bit of uncertainty, a bit of volatility as we call it, the rollercoaster of investments just average in just by a month at a time, a portion of your money. And you'll be rewarded in the long. I think that's a, a great place to stop riper from precedent investment management. Thank you so much. You know, to have the, the man's asset allocation on, on, on this podcast with us helps us a lot.
Cuz you're, you're, you can buy anything. You're not buy us to shares or bonds or cash or property. You can buy what you want. And so to get those views I think is, is really valuable. I'm definitely gonna get you back on again if you, if you, if you don't mind. I, I think these are good for me if nobody else. So, so thank you so much for your time. Thanks Warren. Thanks to the listeners.