During a recent presentation by PSG Asset Management we were once again reminded of the forward-looking nature of financial markets. What we mean by that, is the suggestion that the current value of a share, a bond, or even a currency, already reflects the impact of potential future events. This will mean that:
- The meteoric rise in the Naspers share price reflects the expectation that the Chinese-listed company Tencent in which Naspers has a 34% stake will continue to grow its earnings at eye-watering percentages.
- The dismal performance of Steinhoff International reflects the multiple allegations against their reporting practices.
- The increase in the yields on the SA government bonds reflects the possible downgrade of our credit rating to junk on local debt.
- The recent collapse of the SA rand against the US$ and other currencies also reflects the credit rating downgrade; as well as the capturing of the Treasury by Zuma.
The question we must ask ourselves, is: if the above-mentioned examples are indeed correct, what will happen if the expected outcome materializes or if the opposite happens? So: if Tencent’s earnings falter, will Naspers go down? If the allegations against Steinhoff are false, will the share price go up? And if our credit rating is downgraded, will our bond yields come down and will the rand strengthen because of the removal of the uncertainty?
The answers may be found in history. We see that uncertainty tends to make investors overreact and that, when the uncertainties are removed by their realization or non-realization, the pendulum swings the other way. That is why many investors who base their investment decisions on the day-to-day reporting in financial media get it wrong. The future uncertainty is already discounted in the price they pay today. That may still mean, however, that the future uncertainty may yet be understated and that the actual future outcome may be worse or better than expected.
When investment decisions are made, therefore, it is important to understand the longer-term value of an asset and not get fixated on the shorter-term fluctuations in its price. It may also be necessary to hold on to the asset for longer than you initially anticipated to allow for the shorter-term uncertainties to get washed out of the system eventually.