Commodity boom and timing the market

We have seen a volatile couple of days in the market as investors have re-calibrated their expectations of how aggressively the Federal Reserve will raise interest rates this year to stamp out inflation. It is a real cause for concern because a tightening cycle that prioritizes crushing inflation above all else will hurt the economic expansion and the stock market alike.

However, we do not want to move completely to the sidelines out of fear of a USA Fed-mandated slowdown, because there is always a bull market somewhere, and it is a fund manager’s job to find it and become more selective with the shares in his fund. It is perhaps time to once again understand that timing the market is a risky business. The graph below reminds us that your investment returns can take a severe beating if you are not invested during the good days over time.

The good news for South Africans is that we are in a unique position to benefit from a global commodity boom. Prices of oil, coal and gold have risen to decade highs since last month, driven by geopolitical tensions in eastern Europe and supply chain disruptions. These increased prices could result in an upward revision of corporate tax revenue this year, which would bode well for our fiscus. Looking at the graph below, this commodity boom could last for some time to come.

The risk in South Africa is that we will not benefit from the boom because of wasteful expenditure and infrastructure problems. During the last commodity boom, the inability of Transnet to move the products to our harbours cost us billions in potential revenue.

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