Jacobus Brink

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

We pivoted to a more defensive stance towards the end of 2021 as it became clear that the Fed’s narrative of transitory inflation was flawed – not only from an equity point of view but also from a fixed income point of view. The problem we saw was that the typical inverse correlations between stocks and bonds tend to reverse during inflationary environments where growth is slowing. We saw this play out in 2022 as it became one of the worst years for a typical 60/40 portfolio. As we expected rates to normalise, we went underweight stocks and bonds and used these allocations to fund our allocation to alternative strategies, which tend to do well in a volatile macro environment. For example, global macro, equity long-short and CTA mandates.

From an equity point of view we have maintained an overweight to more quality focused mandates in favour of growth mandates. Within the fixed income space we have favoured high quality, short duration credit and conservative go-anywhere strategies that can invest in the broader fixed income asset space, i.e., FX, CDS’s etc.

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

The major geopolitical events like the invasion of Ukraine actually worked out well for our narrative of higher volatility and a larger opportunity set available to alternative mandates as we have seen some large dislocations in some commodity markets and inflation coming through due to rising energy costs and supply chain constraints.

In what ways have markets surprised you this year?

The market surprised us in how resilient it has remained despite all of the mounting evidence to suggest corporate profits in the US will slow materially into the start of 2023 and that analyst expectations remain too elevated in our opinion. This, together with the reluctance of core inflation in the US to come down meaningfully, and the market remaining fairly convinced of a slowdown in Fed hikes at some stage, remains a mystery. History has shown us 2 things: something mostly tends to break when the Fed is so far behind in the curve in raising rates and secondly that in order to break inflation’s grip on the economy, interest rates need to rise to above CPI rates which could suggest a terminal Fed Funds Rate of closer to 6% – a far cry from where we are now at 3%!

A second surprise was the continued dumping of Chinese equities. The Hang Seng Index, which is more reflective of foreign demand for Chinese equities, is currently approaching 2008 levels and is trading at a forward P/E of mid-single digits.

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

The largest lessons have definitely been to not fight the Fed, no matter how bad things look. With the astonishing amount of stimulus, it was quite something to see to what extent a central bank can prop up an already weak economy.

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

The most hotly debated questions were definitely around China and its role going forward.

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

By far the largest impact on our portfolios came from our allocation to alternative mandates. All of the alternative exposure that we have in our client portfolios have shown their worth in times of uncertainty and has put to bed the narrative that there is not a place for these mandates in any balanced portfolio. All of our alternative mandates are up YTD and have allowed us to control the drawdowns and volatility in our client portfolios very well.

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

The idiosyncratic issues that South Africa have faced this past year have been tough. Unrest, flooding and the persistent loadshedding had a harsh influence on the economy. The expected global slowdown in economic growth will also definitely have a continued impact on the country. We do, however, believe that despite the challenges the country faces, we are in a better position than most emerging economies – and even a few developed market economies who are sitting with out-of-control inflation. With the next elections creeping closer, we believe we could see some political stress as a possible regime change nears. Whether this would be positive or not remains to be seen. Rather the devil you know…

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

The most interesting conversations we’ve had with managers concerns the most hotly debated topic – China. China remains a desirable investment destination, notwithstanding the present slowdown and continued Covid-19 issues. While central banks around the world aggressively increased interest rates to combat record-high inflation, the People's Bank of China went the other way with increased easing of monetary policy. The ability of China to make its monetary policy independent of the United States is a significant distinction between it and developed markets.

The emphasis is now on the party, national revival, and a common prosperity, built on a communist foundation, as President Xi has concentrated power and changed the ideology from the decade-long focus on market-friendly reforms to eliminating poverty through economic growth and catching up technologically with the West. A desirable result would be if the party under Xi turned around and concentrated more on allowing the Chinese version of the market economy to operate more freely in order to celebrate its near-absolute power concentration.

Since the perception of China has been so bad for so long, and in some areas rightly so, the serious pessimism that has taken hold could, in actuality, see some positive catalysts appear.

We believe the longer-term outlook could still be favourable, despite potential bumps along the way.