Walking down an imaginary financial street, you realise how noisy it is these days. You hear people shouting about the brewing USA recession as indicated by the US inverse yield curve. (That is when you get a higher return on a shorter-term US government bond than the longer-term ones, signalling a weaker economy.) You hear people talking about how damaging the trade wars are and that it can be a protracted detractor from world growth.
You hear about the complete bedlam that is Brexit, and how EU trade will take forever to recover. You hear about the simmering hostility between Iran and the USA; the testing of ballistic missiles in North Korea; and, of course, that Ace Magashule will oust Cyril and become President of South Africa.
It is therefore understandable that you are downcast and even fearful. Every braai you go to, people talk about the death spiral of South Africa and the expensive stock markets worldwide. You agree with your neighbour that the only place to be, is in cash, and that you will invest only when things look rosy again. And that is why it is not wrong to have more cash at this moment than you would normally have as a longer-term investor. There are times when cash is the right place to be and in hindsight the last five years fell into that category.
What you should remember, however, is that if you know something – good or bad – that will have an impact on a share, everybody else knows it too and the price of the share will already reflect it. So all the bad news has already been discounted in the equity markets.
Rather wonder what would happen should you read one of the following headlines tomorrow:
- Trump and Xi have reached a fantastic trade agreement!
- Brexit has been resolved and the outcome is much better than anticipated!
- Cyril Ramaphosa has fired Ace, Jessie and David and everybody implicated in corruption has been indicted!
- Zuma senior and Zuma junior have both been found guilty and – together with the Gupta brothers – will serve time in prison!
The result will be a recovery in equities faster than you can swallow your coffee. It is therefore important for a longer-term investor to still own a slice of the equity pie, even if it is a bit smaller than it should be.