Glenn Silverman

The big themes in markets this year were rising inflation and interest rates. How did you respond in your allocations?

We didn’t make many significant strategic changes to our positioning but did avail ourselves of some more tactical opportunities flowing from the market volatility. That would have been with respect to asset classes and the rand.

How have some of the major geopolitical events we’ve seen this year influenced your decision making?

We spend a fair amount of time assessing geopolitics and the possible impact on markets. It waxes and wanes over time. Of late, it has been more important. We coined the phrase ‘geopolitics trumps economics’ and commented publicly on this.

Besides the obvious, the impact of the Russia-Ukraine war on oil and gas prices – and hence its negative impact on the already high, and sticky, global inflation numbers, mainly in the West – was a particular concern. That largely played out, with more stubborn inflation leading to higher and faster interest rate hikes, especially in the US, and the concomitant negative impact on asset classes.

In what ways have markets surprised you this year?

While we were cautious coming into the year, the speed and extent of the fall in equities and government bonds still came as somewhat of a surprise. We have seen the worst bond and equity returns in many decades, with a typical US 60/40 portfolio experiencing the worst drawdown in a century or so.

With so many years of having the ‘Fed put’ in place to support markets – where every serious dip was indeed a buying opportunity – this has finally reversed, with the Fed now refinding its ‘Volcker’. That surprised many market participants and led to worse-than-anticipated returns, pretty much across the board.

How did the lessons of 2020 and 2021 help you in 2022?

The back end of 2021 was the first indicator of things to come. But 2022 has, in many ways, been very different to 2020 and 2021, with the carnage intense and widespread. However, 2022 was in many ways a consequence of, and response to, the aggressive actions by the authorities to the Covid lockdowns in 2020. The massive stimulus saw a recovery in markets and economies but sowed the seeds for the much higher inflation that followed. Hence, it should not have been that surprising.

Which asset allocation questions have been most hotly debated this year in your team?

Many areas have been hard hit and some have looked cheap for a while, even ahead of the recent falls. These would include China, emerging markets and Africa, yet they have fallen further. One of our key internal debates is whether some of these may be ‘value traps’ and how one might best identify and profit from (or avoid) such areas.

Value as a style has made a big recovery, so discussions around switching back to growth were also hotly debated.

And then, finally, with global bond yields having moved up so strongly, pretty much across the curve, the debate around whether, and at what levels, to buy abounded.

What decisions have you made this year that have had the most impact on your portfolios?

We focus on the long-term liabilities of our clients and how best to match them. To that end, we use our internal, proprietary asset-liability model, which has been developed and refined over the past two decades or so. We have a valuation bias and like to buy assets when they are cheap, and vice versa. With heightened volatility, we can and do avail ourselves of more tactical opportunities. These often manifest in the currency space.

We were able to trade successfully both in and out: SA equities, SA listed property and the rand, when each was at a perceived valuation extreme.

Do you believe that the investment landscape for South African investors is more or less attractive than at the end of 2021?

This is a tough question to answer. Earnings have come through strongly both in SA and globally, making equities (historical price-to-earnings ratios) look reasonable. But future earnings are at significant risk as interest rates rise, and global growth slows, along with some other concerns, including government and corporate debt levels, derivative exposures, the risk of policy error etc.

Bond yields have risen sharply, to levels which may be attractive, yet the above risks remain, along with stubbornly high inflation rates – CPI, but even more so PPI. As such, we are being more cautious than usual and await even stronger signals – ie, levels of cheapness – than usual, before moving.

What are the most interesting conversations you have had with asset managers this year?

From a direct market perspective, the key discussion has been around inflation and its implications, for valuations, asset classes etc.

Aside from these, we continue to focus more of our research time, and questioning of managers, on matters related to ESG. This area has, likewise, become an increasingly contested, complex and competitive space. It is taking up more of our bandwidth, research and thinking time.