Veenesh Dhayalam

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

There was a preference for inflation-hedging instruments, gradually introduced on the domestic side in the second half of 2021 with a doubling at the beginning of the year and now a reduction, as we may have already seen an inflation peak domestically and other fixed instruments offer better value. Also tactically allocating to low-duration strategies (value-type) given the increased rate cycle leading to the recalibration of growth expectations by the market.

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

Certainly, there was much to ponder as we progressed through the year. There had been hope that during the year, some sense of normality would have returned concerning the economic recovery from the pandemic. However, what we have experienced is a confluence of events including geopolitical power shifts that have undoubtedly instructed a move into a new era where there may be no return to normal in the foreseeable future. Geopolitical events almost inevitably create disruptive economic conditions which then feed into investment markets. With this and other considerations in mind, a more practical and heightened risk-conscious mindset was applied using scenario analyses based on the impending risks. This would then inform the positioning of the funds from a timeframe/duration and type of strategy to favour.

In what ways have markets surprised you this year?

Markets will always surprise with anomalies and this time the questions were around the so-called safe havens including gold, US Treasury government bonds and the Japanese yen, which were anything but.
It was also unfortunate to see the weighty matter of sustainability falling off the radar and even being looked down in a time of crisis.

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

2020 and 2021 painted a binary scenario world, which requires one to be able to adapt and have the ability to shift strategy swiftly if required, as the momentum of change is always rapid and sometimes without warning, implying a distinct focus on liquidity and quality of underlying assets. Another valuable lesson is not to be fixated on views that disregard the enormity of macro risk and the structural changes that this could introduce that would severely alter any backwards-looking assumptions. To seek opportunities sensibly even in hopeless situations, as this is where much latent potential can be unleashed.

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

While not directly an asset allocation debate, the heat was around which was the most likely scenario to play out – ie, stagflation, recession and goldilocks. With the dynamics behind each laid bare, probabilities were assigned to each outcome as well as the impact on asset class returns – importantly though, with the awareness that newsflow or risk events may alter these outcomes and accordingly there had to be the flexibility to tilt to a different scenario. Another conversation was not just around the increase in offshore allocation but the use of a currency hedge that would provide a further lever to be used to manage the currency volatility. Another conversation was around whether to ignore or consider China given the direct and indirect impact it has on economies and markets.

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

In embracing ‘the appropriate risk at the appropriate time’ mantra, one of the important decisions was to roll over the already-in-place offshore equity hedge for an additional term. The hedge implemented at the back end of 2021 protected on the downside up to a certain specified level with full upside capture, successfully served its purpose and, given the well-documented economic and world events that were unfolding, we decided to continue along this line of thinking. We adopted a more measured approach to the increased offshore allowance to take advantage of tactical positions, which we will do so opportunistically with a recent marginal allocation to offshore bonds, as an example.

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

It’s no secret that the country, already hamstrung by poor economic performance over multiple years and the Covid hangover, may remain in a sluggish growth trap which would hurt company earnings. This in turn would negatively impact their performance with a spillover into investment returns. Investors should become less equity-centric and consider other asset classes that would offer value not just from a diversification perspective but also provide a steady return/yield stream with less volatility. That being said, equity opportunities will remain – some more attractive than others – and active management should benefit from the dispersion in instruments and sectors.

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

It is always absorbing to see the bifurcation in asset managers’ views on certain topics and quite rightly so as it would be quite difficult as an asset allocator if all thinking were the same.

Topics such as the increase in offshore allocation and the timing thereof led to the evergreen domestic-versus-global discussion. Surprisingly, there was no immediate dash, but an unhurried approach by certain houses to increase their offshore allocation with relatively attractive domestic valuations being one of the primary reasons, while others took the opportunity to increase their offshore allowance based on diversification.

Other topics included the NPN/PRX dynamic and how the overhang of China impacted these companies, with some asset managers quite negative while others still see the potential based on the Tencent narrative.