Lubabalo Khenyane

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

These two themes led to a selloff in most financial assets. Equities are now off their 2021 highs and bond yields have reached levels last seen 10 years ago. In our multi-asset class funds, we have been neutral on equities but looking for opportunities to increase when the recession dust settles. In bonds, we increased exposure to South Africa (SA) bonds to take advantage of the higher yields but remained underweight offshore bonds as global inflation has proven to be stickier. We remain underweight SA cash, despite the interest rate hikes by the South African Reserve Bank (Sarb), as it is still offering very low returns.

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

We monitor geopolitical events but tend to shy away from making investment calls that are informed by them. For example, the Russia/Ukraine war has had a devastating impact on oil, gas and food prices. This, coupled with the supply chain disruptions that were caused by Covid-19, has sent inflation skyrocketing. We look at this but focus more on central banks’ response to higher inflation and the impact on various asset classes.

In what ways have markets surprised you this year?

The performance of SA equities in the first quarter of 2022 was surprising. The war in Ukraine had just started, sparking a risk-off environment but local equities (FTSE/JSE Capped Swix All Share index) rallied 6.7%. We understood the commodity underpin but did not expect a local equity rally in a risk-off environment. The US Federal Reserve’s September response to recession fears was also unexpected. We were of the view that as inflation starts to come down from the 9.1% peak in June, the US Fed would pivot as it tries to avoid a recession. It came out in September and confirmed its commitment to arrest inflation, even if doing so leads to a recession.

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

The past two years reminded us of the importance of staying invested. Global equities, as measured by the MSCI All Country World index, lost 21.3% in Q1 2020 (in USD). For the remainder of 2020, they went on to rally 48.4% and added another 19.0% in 2021. Had we panicked in the initial selloff, our clients would have missed out on the recovery. This is playing out again this year, global equities are down 25.4%. Anything can happen over a quarter or two quarters, but, as in those two years, we think on a 12-36 month view, equities are likely to rally.

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

There is a lot we have discussed in 2022 but the decision on when to increase exposure to growth assets is one that has been at the forefront. On the one hand, valuations are attractive – SA equities are on a forward PE of 8.1x and global equities are trading at 13.7x. Secondly, employment data from the US remains strong. On the other hand, the yield curve has been inverted for more than three months now suggesting that a recession is looming. In addition, the US Fed remains unwavering in its interest rate hiking path. Looking back, it will be interesting to see whether the path resembled Everest or Table Mountain.

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

Following the changes in offshore investment limits from 30% (plus 10% in Africa) to 45%, we reviewed the strategic asset allocations for our multi-asset class funds and decided to increase offshore exposure. In most of them, this predominantly meant reducing local equities and buying offshore equities. We made the decision in March and subsequently started to increase global equities. This decision added value as since then, local equities are down 12.8% while global equities in rands are only down 2.8%.

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

We think it is more attractive. Equities now provide opportunities for active managers and fixed income assets are also looking attractive. The yield curve has shifted up by 120 to 210 basis points this year as inflation has proven to be stickier than originally thought in 2021. Cash, which was yielding 3.7% last year, has also repriced to 6.5% as the Sarb has hiked interest rates by 250 basis points since January.

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

One that sticks out was with Futuregrowth Asset Management. Given that Eskom implemented stage 6 loadshedding in September, it was interesting that in the same month, the manager was talking to us about how independent power producers have been waiting for Eskom to connect them to the grid. The manager was also talking about how quick it is to construct alternative energy plants. It takes about one-and-a-half to three years to construct a new plant - contrast that with Eskom’s Medupi coal plant which took more than a decade. This conversation highlighted the need for a better relationship between government and the private industry.