Roeloff Horne

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

We reduced our global equity exposure early in January after the December market rally.

We preferred SA equities relative to US and non-US equities, dictated by cheaper SA valuations and excessive S&P 500 valuations.

A month after Russia invaded Ukraine, we started trimming our SA equity and global equity exposure and started holding some US dollar cash positions to safeguard against emerging economic imbalances. We then used the risk-on rally into August to reduce risk marginally as we thought that rising global interest rates would start to affect sentiment negatively. This meant we were underweight all SA and global risk asset classes (relative to our long-term strategic asset allocation) over the past six months. Our underlying fund managers did well to minimise risk and avoid large losses.

Since the market lows of September, we have started to add exposure to equities, bonds and property, as well as emerging market equities.

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

At first, we were more concerned about excessive valuations in the S&P 500 and did not react to the Russian/Ukraine invasion immediately. We did reduce our overweight SA resource exposure in April during a correction in resource equity prices but remained constructively invested in the sector as the global energy crisis started to unfold. Our exposure to gold as an insurance policy due to global geopolitical risks was ineffective as higher US interest rates and global economic uncertainty motivated investors to support the US dollar. We do not like gold as a long-term investment strategy, but it serves a dual role as insurance against geopolitical risks and the potential of a reversal in the US dollar’s fortunes.

The strong move of the unsynchronised equity sector and asset class performance made it difficult to identify trends other than the energy sector. We did increase our exposure to a basket of spot commodities (industrial metals and oil) as the potential for scarcity and political intent could affect their supply/demand dynamics.

In what ways have markets surprised you this year?

The speed at which the market reacted to a hawkish US Federal Reserve surprised us, as well as several other global events that introduced a period of confusion and uncertainty.

We have high conviction that we have moved away from the period of great moderation (low interest rates and inflation, high liquidity, low geopolitical risk and globalisation) to an ‘age of confusion’ ahead. Let’s explain.
We are experiencing a war in Ukraine, a politically driven economic Cold War, a global energy crisis, and a Fed keen to reduce inflationary pressures by hiking US interest rates influencing most other central bankers to follow. This is a slow ‘poison’ to reduce economic activity. A stronger US dollar is inflicting pain on emerging markets with US dollar debt obligations. We are also experiencing self-inflicted slower economic activity and growth in China as it implemented a zero-Covid policy. We have experienced chip shortages as an aftereffect of Covid-19 lockdowns impacting automation and digitisation, which normally is a deflationary force. The lack of production of substances supporting agricultural fertiliser is the next contingency to be concerned about as this could lead to food shortages in 2023.

We expect more political fiscal influence in the short term as the above-mentioned economic imbalances make inflation more resilient than at any time in the past 40 years.

Many commentators expect the Fed to dial down the hawkish rhetoric and pause interest rate hikes. This will only ease the pain temporally as the current imbalances also need a peace accord in Ukraine, a normalised Chinese economy and an increase in US/global productivity to enhance GDP growth to service the massive debt created in 2020 and 2021. All of the above applies to the SA landscape as well.

An age of confusion awaits – portfolio managers and fund selectors will need to add significant value to outperform inflation.

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

The lessons of 2020 and 2021 were to adopt flexibility within asset allocation methodology as information changed and realise that the global economy is experiencing several imbalances. These imbalances made us cautious going into 2022, which protected our portfolios well as of the time of writing. We were under severe pressure to replace some of our fund managers who underperformed during 2021; our vigilance and trust in them served us well in 2022.

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

The balance between risk assets and SA and US dollar cash. Recently we discussed the various scenarios we can expect for 2023 and we realise that the most important directional change for our portfolios will be the fortunes of the US dollar. If the US dollar depreciates in the next year, investors should expect double-digit returns from most SA and global risk assets in 2023.

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

A more overall conservative approach relative to our long-term strategic asset allocation neutral allocations and the consistency in our fund manager selection process served our portfolios well in 2022.

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

Risk assets are more attractive – after a major selloff in most global risk assets to date of writing – relative to any time since the global financial crisis. Valuations do matter but tell nothing about future short-term returns. Markets need more certainty around interest rates, inflation, global commodity scarcity, and an end to the war in Ukraine and the Cold War to ignite a sustained rally in risk assets.

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

Last year, our answer was the conversations with Rob Spanjaard of Rezco. Those conversations assisted us in being more cautious this year. The latest, most interesting conversations are with a few asset managers that have used the market weakness to add risk assets to the maximum limits of their mandates/regulatory levels recently. In my 32 years in this industry, the disparity of market views and asset class positioning between reputable asset managers has never been so high.