Don’t put all your eggs in one basket
Asset managers diversify amid risks, writes
Multiple risk factors continue to influence global market conditions and shape asset manager portfolios. Geopolitical tensions due to conflicts in the Middle East and Eastern Europe and escalating USChina trade tensions add to the fundamental economic headwinds from stubborn inflation, which continues to delay the expected interest rate cutting cycle.
This uncertain macroeconomic and political backdrop warrants an overall defensive asset allocation stance, suggests Carl Chetty, senior investment consultant at Hollard Investments. Globally, Hollard Investments favours defensive assets such as US cash instruments and short-dated treasury bonds over equities and property at a broad market index level.
“Nonetheless, we believe there are opportunities for outsized returns in the global equity markets through careful stock, sector and country selections.”
From a local perspective, Chetty identifies shorter-dated South African government bonds as attractive options due to their high starting yields, low duration risk and low default probability.
“Local yields are still quite favourable on fixed income instruments and portfolios, with nominal bonds offering an attractive yield to maturity,” says Kingsley Williams, chief investment officer at Satrix. “This is also an attractive asset class to invest in now to lock in the benefit before markets price in interest rate cuts if inflation eases.”
Despite the high yields on SA bonds, with markets all agreeing on valuation, Mohamed Ismail, head of fixed income at Mergence Investment Managers, says no-one is buying.
“Though this seems counterintuitive, there is a good reason. Inflation remains stubborn, with higher-forlonger interest rates serving as a buffer to the reflationary narrative.”
With a slower pace in the rate-cutting cycle in the US now expected, Ismail says rates locally will remain elevated together with the rand.
“Investors could go offshore for yield when rates are this high, but they face the same challenge, albeit with less liquidity.”
Given the inflation risk and
the fact that markets are not discounting the possibility that short-term interest rates have room to climb, Ismail believes a bearish stance on SA bonds is bullish.
“Enhanced yield or enhanced cash funds are the real play for 2024. While nominal interest rates stay elevated, and inflation remains sticky, these instruments offer healthy real returns with a lower risk of capital loss.”
From a local equity perspective, Williams says South Africa is cheap relative to other emerging and developed markets.
“Depending on which index you look at, the p:e ratio in our market is 12-13. This is low compared with broad emerging markets sitting at 15 according to the MSCI emerging markets index, with developed markets at 22, according to the MSCI world index. The US market as measured by the S&P 500 is even higher at 26.”
According to Williams, a p:e that is less than half of the US equity market suggests there is potential for longterm excess returns in the local market.
“One way investors can efficiently capture local market exposure is through the recently launched FTSE/JSE global investor index,” says Williams.
The index consists of the top 50 companies from the FTSE/JSE all share index when ranked by investable market capitalisation and is based on the principle that all dual-listed shares are fungible. The approach makes no adjustment for the Strate register and weights all companies, including duallisted companies, on their global free float.
“With a p:e of 13, it is still relatively cheap, providing investors with a cost-effective access point into the market, while providing a relative rand hedge, which would offer some benefit if the local currency were to weaken,” says Williams.
Chetty says if the South African election outcome is viewed negatively by the market, long-dated government bonds may also underperform, along with listed property and equities.
To diversify portfolios, Hollard Investments advocates including alternative investments, such as private debt, equity, real estate and hedge funds, as they offer noncorrelated returns, lower volatility and enhanced yield pickup.
“We believe local private debt and offshore-listed infrastructure equity can reduce risk and enhance returns. We also see potential in reasonably priced hedge funds for tactical purposes due to their wider toolbox, which gives them the ability to generate consistent and uncorrelated positive returns,” adds Chetty.