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SIMON BROWN: I’m chatting now with Izak Odendaal, Old Mutual Wealth investment strategist. Izak, appreciate the early morning. A recent note you put out points out that five major crises have hit the world in six years – excluding our own internal sort of load shedding and the riots in back in 2021.
I remember the crash of ’87, and I really thought that I was getting my crash out of the way soon. This has almost become a feature of global markets – there are crises. They come often and markets bounce back almost as quickly.
IZAK ODENDAAL: Yes, I suppose it’s either good news or bad news, depending on how you look at it. But I think both of those things are true. You’ve had major global crises – and this war in Iran is now the fifth in six years. If you cross back over the last 15 years, obviously there have been more crises.
In the last 20/30 years, yes, that seems to be a feature. It underlines, I think, underlying fragility in the global economy – that we don’t always realise problems are problems until they are. But, by the same token, we’ve seen this resilience in both economic performance, which has bounced back from each of these crises, and then equity markets.
But markets broadly have been very resilient in the face of these of these crises.
Each time the recovery I think is much quicker than anybody would have imagined.
If you if you go back to the Covid crisis, for instance, the market bottomed long before the virus actually hit us. It almost discounted the pandemic and the recovery from the pandemic in the space of a few weeks. That was quite extraordinary.
SIMON BROWN: I’m reminded of the great financial crisis of 2008/9, almost 20 years ago. That was about it. My memory is telling me it took about a year-and-a-half to get markets going again. My sense is that if it happened today, I don’t know, I can’t imagine it taking a year and a half. There is this belief that if the world’s not going to end you want to buy equity markets because they’re going to run higher.
Frankly, that might sound weird, but the evidence is not contradictory.
IZAK ODENDAAL: The evidence still very much suggests that. Now there is an argument to be made that perhaps the mentality of investors has shifted kind of to the ‘buy the dip’, which in a certain sense means that people are almost actively waiting for the market to fall now, versus maybe 20 years ago when people were very scared whenever there was a market correction.
I don’t know if that’s true, but certainly the evidence over the very long term suggests that these kinds of crises tend to be buying opportunities.
Obviously, if you can position yourself in a diversified portfolio, you can avoid some of the worst of the downturns. I don’t think you can ever really time the market to the extent that you’ll miss the downturns, but you can perhaps miss some of a downturn and then have the opportunity to deploy into the downturn if you have some cash.
I think ultimately the problem for most people is that psychologically it’s very difficult to buy when the market is down, because it’s happening in the context of either a war or a pandemic or some sort of other big external event. People are scared.
People are panicky and in the end what you are left with is really just kind of a buy-and-hold strategy, which I think still works for most people just fine.
SIMON BROWN: Yes, absolutely. Buy and hold and ignore the terrifying headlines. They are terrifying. They are real. But it turns out markets shake them off.
I’m remembering back again to the 2008 crisis and the bailout, which was a huge debate – and quantitative easing and taking interest rates down, et cetera, the sort of stimulus/intervention by governments and/or central banks. Not, to be clear, in this most recent crisis.
Frankly, it has happened too quickly to have any sort of response. That has kind of changed the game, both during the crisis and of course post crisis, leaving some governments with a lot more debt on their balance sheets.
IZAK ODENDAAL: Yes, absolutely. I think interventionist policy is part of why we’ve had the economic recovery and the market recovery for most of these crises. In other words, as you suggested, in many of the cases governments have pumped money into the economy. Central banks have been very eager to cut rates and give stimulus in order to prevent things from going from bad to worse.
Sometimes policy also causes the crisis, of course. The tariff crisis last year was a policy-induced crisis. You could argue it is military policy that’s causing this war. Governments also get it wrong.
But underlying all of this is a is a sense from governments in rich countries that ‘We want to cushion the economic blow for our voters’. And that does create, as you mentioned, the long-term rise in government debt levels. I think that is another source of fragility as we head into the future, for two reasons.
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Number one is it means that at some point the government is unable to respond forcefully because it doesn’t have the fiscal firepower – which is what we see in South Africa. A government without fiscal firepower can give only limited relief when the crisis hits.
The second problem potentially is that that government debt might itself be the source of the next crisis at some point in the future. I’m not saying now. I’m saying over the next 10 or 20 years you could have an event where there’s a loss of market faith in a major government. We saw that during the eurozone fiscal crisis, for instance, in 2011/12.
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We’ve seen South Africa’s bond market hit wobbly points at times, with worries around government debt. And I guess ultimately, if you want to be blunt about it, the big fear in the US is that if you get to a point where the US government starts looking shaky, when US bonds start looking shaky, that really underpins the global financial system.
So that is, I think, a source of underlying fragility. I don’t think anyone can really forecast when, where or how exactly that will play into a market event. I think it is a can that they could kick down the road for a long time.
Governments have the ability to really corral a lot of savings into their bond markets. You can start pushing the banks to buy more bonds; you’re not pushing your domestic pension funds to buy more bonds.
There are a lot of things you can do as a government to get your hands on people’s savings, but you can’t force foreigners to buy your debt. Ultimately it has an impact on the currency.
SIMON BROWN: I hadn’t thought of that – you can’t force the foreigners to buy your debt. That’s actually a great point that I have never thought of.
We’ll leave it there. Izak Odendaal, Old Mutual wealth investment strategist, I appreciate the early morning time.
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