Webinar Highlights: Where Is The Money At? 💸

Published on: Feb 23, 2023 9:00:00 AM

Did you miss our Investment Landscape Webinar with Duane Gilbert, our Chief Investment Officer from Easy Asset Management?

Don't worry EasyVSTRs, we wouldn't let you miss a thing. Here are some highlights and quick market commentary snacks from Duane:

Maintain a conservative positioning with low global equity and think about tilting your portfolio to more recession hedge type investments, such as US Bonds, Dollar cash, defensive sectors like healthcare, consumer staples and utilities.
SA equity are still cheap by global standards, lost of gems in the small to mid space specifically. For the time being we think SA equities are a bit toppy.
At RISE we have identified 3 areas where we can have a meaningful impact and generate returns for our clients: Renewable Energy Infrastructure, affordable rental housing, trade financing for small businesses

Hit play to watch to get started on this informative webinar!

1. What happened in 2022?

To understand what happened in 2022 we must go back to 2020 – a year we would all like to forget. Essentially when Covid-19 spread and countries were forced to shut down, governments and central banks stepped in to protect their economies.

We are all aware of the R500bn stimulus package pledged by president Cyril Ramaphosa in 2020, and the South African Reserve Bank cutting interest rates from 6.5% to 3.5%. But this is nothing compared to how developed markets responded. As an example, the US government spent over $5 Trillion or 25% of GDP in various support programs including stimulus cheques and higher unemployment benefits. To put this into perspective, The US government spent 7% of GDP on stimulus programs in response to the great depression. The US Federal reserve cut interest rates from 2 ½% to almost zero, and more than doubled the debt on their balance sheet from $4 Trillion to $9 Trillion through aggressive quantitative easing.

Needless to say, this was an overreaction. All this stimulus and money printing inflated the price of stocks and created inflationary pressures. Growth was already fragile coming out of Covid, but then we were hit by two big shocks. The first shock was China becoming anti-capitalist almost over-night. They clamped down on a number of private sector businesses including technology platform businesses and property developers. They also introduced the devastating zero-covid policy which meant massive cities and ports were shut down every time new cases of covid popped up. The second shock was the Russian Invasion of Ukraine. Both these events damaged an already fragile global growth outlook and contributed to global inflation through supply chain disruptions, and higher energy prices.

Faced with high inflation, central banks had no choice but to unwind their monetary stimulus packages i.e. reducing their balance sheets and increase interest rates. This, in turn, became another headwind for global growth. In the face of high inflation, high interest rates and low growth, global equities fell hard in 2022- 20% on average.

South African equities, magically, produced a positive return in this environment for a few reasons:

Our equity multiples never really benefitted from global stimulus so the withdrawal of stimulus didn’t have a big impact on us.
South African resource counters, perversely, benefitted from the commodity shortages caused by the Russian invasion of Ukraine.
The rand weakened by 7% over the year which benefitted our rand hedge counters. Remember 70% of the earnings of JSE listed companies are offshore earnings.
Naspers & Prosus and resource counters experienced a massive year-end rally after China abruptly announced an end to their zero-covid policy.
SA Equities are cheap by global standards and sometimes when cheap assets rally, they gain momentum.

2. We note that RISE has performed quite strongly relative to peers in 2022. How did you and your team navigate the market?

That’s correct. Over 2022, we ranked 1st or 2nd in all risk categories of the institutional multi-manager surveys. Something we are very proud of.

The short answer is that we did well to identify the trends we just discussed and position ourselves accordingly. We reduced our exposure to global equity quite early in the year, and rotated our sector exposures to more defensive sectors. We favoured local assets to global and favoured income assets to equities. We also held a lot of cash, especially dollars, which allowed us to buy some cheap fixed income assets during the sell-off.

I just want to be clear that RISE is not in the business of chasing returns by identifying market trends. RISE is a retirement fund asset management business. We believe first and foremost in maintaining market exposure consistent with our members investment horizons, and we believe in diversification. That said, we also believe in managing risk and de-risking our client portfolios when it makes sense. We tend to do better than our peers in bear markets.

3. What is the investment outlook for 2023?

Equity markets started 2023 on a positive note, and that has to do with the sudden reversal of China’s zero-covid tolerance policy and the announcement of a new stimulus package. In our opinion, some market recovery is justified.

Certainly, economic activity will improve on the back of pent up consumer demand being released. We saw a similar thing play out in developed markets when they ended their lockdowns. However, we believe the market is being too optimistic. The reversal of their lock-down policy does not negate the damage that 3 years of strict lockdowns have done to the economy. And the quantum of their stimulus package (issuance of R1.2tn in bonds) is not enough to offset the damage caused by their clampdown on the private sector, particularly the property sector which generated a lot of tax revenue.

In short, consumer spending is likely to rebound but Infrastructure spending, which drives commodity demand, is unlikely to rebound strongly. I think China policy is something we need to keep a close eye on, but for the moment it’s too early to get excited about it. Chinese onshore equities which are held by locals rallied 10% this year while Chinese offshore stocks are up 50%. This suggests that foreign investors are far more optimistic than local investors.

China debate aside, the rest of the global environment remains unsupportive.

• High inflation, hawkish monetary rates persist. That hasn’t changed from 2022

• Growth is slowing – PMIs for all major economies below 50 and trending downwards

• US recession increasingly likely – all historical recession indicators are positive

Yet, despite all this equity valuations and earnings estimates are 15 to 20% higher than where one would typically expect them in a recessionary environment, which means there will likely be more downside.

The biggest reason markets are holding strong is that they believe the Fed will back off once growth starts to slow and cut rates. And in the past the Fed has done this. Since 2008, everytime the Fed tried to withdraw stimulus and there was a weak jobs number or something, the fed would quickly become accommodative. But the key difference now, is that inflation is a problem, where in the years post 2008 deflation was a much talked about possibility. I don’t want to labour too hard about the Fed. All I will say is that the Fed communication is clear – that they prioritise the fight against inflation over growth for a period of time. And inflation is above the Feds 2% target while unemployment is below the US average of 4%. Eventually the market will have to accept the Feds guidance and we will likely see a sharp sell off.

Past that it’s hard to speculate, It really depends on a number of events that are hard to predict such as the severity of the correction, what the global inflation outlook will be, what the unemployment rates will be, how the Fed will react etc.

4. Where are the investment opportunities in 2023 and how are your portfolios positioned?

For the reasons just discussed, we maintain the conservative positioning we had in 2022 where we are low global equity and tilted towards defensive and high quality stocks. We continue to favour local assets to global. We also continue to hold a lot of cash which allowed us to buy cheap assets during the sell-off.

What is different about our positioning this year is that we believe the chances of a US recession are high. As a result, we have introduced some classic recession hedges including dollar cash and US treasuries.

Locally, reducing our large fixed income exposure because our local issues like load shedding and political instability is showing itself in our bond yields.

SA equity are still cheap by global standards, lost of gem in the small to mid space specifically. But for the time being we think SA equities are a bit toppy after their 25% rally since October and are not reflecting the impact of global recession and domestic issues.

If the global market correction we anticipate happens very quickly we could end up in a scenario where assets are broadly cheap or pockets of the market become cheap. This occurred in the covid market sell-off in 2022. Sure, there was a lot of uncertainty at the time, but investors were able to pick up high quality SA equities such as banks at a 20% discounts. It’s too early to say where the opportunities will lie this time, but we feel it is prudent to hold cash in our portfolios to take advantage of those opportunities, whatever they are.

5. Tell us about the impact investments in your portfolios?

Impact Investing is something we are very passionate about.

The South African retirement fund industry market is roughly R4 trillion. But if you look at a typical retirement fund, 30% of the assets go offshore straight away and another 40-50% goes into listed equities. As I mentioned earlier, 70% of the earnings of the JSE are offshore earnings. This is unfortunate. South African retirement funds have the opportunity to invest in the SA economy but they don’t. Don’t misunderstand, first and foremost, our responsibility to generate returns and manage risk. This is not a charity. But that does not mean you cannot do both.

At RISE we have identified 3 areas where we can have a meaningful impact and generate returns for our clients:
1. Renewable Energy Infrastructure
2. Affordable rental housing
3. Trade financing for small businesses

6. What is the outlook for South African interest rates?

SA inflation looks to have peaked and is coming down. Although I doubt it will reach the 3-6% band this year. We believe the SARB is close to the end of their rate hiking cycle. We might see the SARB hike rates by another 25 bps and hold it there.

From there, it’s hard to say. Everything the SARB does is very data dependent. They do not give long projections the way developed market central banks do. The FRA curve prices in a broadly flat repo rate for the remainder of 2023 before a gentle easing cycle at the end of the year.

7. What is the outlook for the petrol price?

Unfortunately, the outlook for the petrol price doesn’t look good. After spiking to $120 a barrel after Russia invaded Ukraine, it slowly trended down about $77 a barrel through 2022 on the back slowing growth. Going into 2023, the end of China’s lockdown policy should cause a significant rise in demand, as the Chinese resume shopping, driving, and flying. At the same time, Russian oil production is still 700 000 barrels per day down as a result of European Embargos. A lot of credible. Global energy analysts think Oil could reach $120 a barrel this year.

Now if the Rand strengthen to maybe R16 to the dollar by the end of the year, we could see petrol reaching R27 a litre.

8. How will load shedding affect my investment portfolio?

Loadshedding and high electricity prices are bad for businesses, period. Whether we are talking about small family owned businesses, or large cap listed counters. Yes many of our large listed counter generate revenue offshore but even they are not immune to loadshedding.

In 2023 load shedding has become dramatically worse and electricity costs are increasing. But the JSE is reaching all time highs. I think the movements in resource prices and Naspers/Prosus is hiding a lot, but also, I think the full impact of load shedding isn’t really priced into our market. In contract, our currency and bond market seems to be pricing in load shedding quite well. I think we will see companies take strain as 2023 earnings come through. Domestic, consumer facing businesses like retailers and property counter will be the hardest hit.

9. What is your advice to our listeners for their investment portfolios?

Don’t get FOMO. Don’t be afraid to sit on a bit of cash and enjoy the high interest rates for a while. But don’t forget that over time equities still generate the best returns, so I wouldn’t encourage anyone to liquidate their entire portfolio.

Think about tilting your portfolio to more recession hedge type investments, such as US Bonds, Dollar cash, defensive sectors like healthcare, consumer staples and utilities. Stocks with high quality attributes are also important.

Remember when market are unpredictable, diversification is your friend. Remember, you don’t know what you don’t know.

10. How can our listeners invest with RISE?

If you have a business, with employees. Or you are a decision maker in a business with employees. And you want to get your staff into a retirement fund. I would encourage you to visit our website and connect with us that way.

As an individual, you can check out our bundles on the Easy Equities platform.

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