Financial Planning & Wealth Management

The GNU

We’ve seen some positive swings locally – both the rand and the JSE are at their best levels in almost a year.

Have a look at the rand – it’s been a year since it broke R18 to the USD.

The JSE is also at all-time highs.

 

Table: JSE All Share Index

I’ve read a lot of commentary crediting the proposed Government of National Unity (GNU) for these positive swings.

 

I am always wary of this kind of commentary. Just because it makes sense doesn’t mean it’s true. Quantify it.

 

I’ve written before about how the 10-year bond yield serves as an indicator for the global investment community’s view of us, and whether it is local or offshore factors influencing our market and rand.

 

The chart below shows the latest South African 10-year yield against the US 10-year yield curve. If they move in unison, then it is international factors at play. If there is a dislocation, then I’d say it is more local factors.

 

We see both these yields dipping sharply in the last month, although the South African curve dipped a bit more than the US. On this basis, I’d say the upswing in our markets and rand is only partially driven by the GNU. Rather, it is still largely international factors at play.

So, are international markets at all-time highs too?

 

The S&P 500 is. It’s already up almost 16% this year.

This is what happens when bond yields fall – lower yields mean investors look for alternatives for their return, and what better alternative than equities.

 

And the trend of large tech driving the US market continues. With Nvidia recently becoming the largest company by market cap in the world, the Nasdaq is already up over 20%.

Surely this can’t last? The Nasdaq is up more than 120% over the past 5 years.

 

I’ve read some commentators liken the recent AI-driven boom to the dot-com bubble back in 2000. The dot-com meltdown was an ugly market collapse that lasted until 2003.

 

I’m not convinced by that argument for one decisive reason: earnings. Look at the graph below from Bank of America. It compares Nasdaq earnings (dark blue) to Nasdaq prices (light blue) as a percentage of the S&P 500.

As you can see, during the dot-com bubble, tech stock prices completely detached from their actual earnings. That’s not the case now. Earnings and prices are closely aligned. It’s okay for a stock price to move in tandem with its earnings. I’d be worried if the earnings stayed the same but the stock prices rose.

 

Back to our GNU – clearly, it has had a positive impact on our market and our bond market, but the positive moves are also being driven by international factors. The global markets have been moving in unison against the backdrop of falling inflation.

 

So, what should you do? Nothing. BUT ONLY IF you have a plan in place. If you do, your local and offshore equity components would be the highest they have ever been. You’d be feeling happy. But don’t let your feelings get in the way of your decision-making. The markets can drop just as fast as they rise.

 

Rather, stick to your plan. Build a portfolio that can withstand shocks and matches your goals. If you can get this right, then you’ll enjoy the upswings and be protected for the downswings.

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About

 MattFin is a blog that focuses on wealth management, investments, financial markets and investor psychology. I build financial plans and portfolios for families and individuals

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