Implemented Consulting Q4 2021
2021 ushered in healthy equity market returns, but what is in store for 2022 and where are the risks and opportunities?
Twenty twenty-one has been another exceptional year with respect to local and developed market performance, with the All Share Index delivering 29%. Developed market equities as per the MSCI World Index returned 32.3% in Rands, marginally outperforming the local market, but emerging markets underperformed, only returning 5.9% in Rands. Local listed property continued to deliver stellar returns of 37%, even in the face of short- and medium-term headwinds such as the pandemic, work from home and a challenging retail environment. Local bonds delivered inflation-beating returns of 8.4%, whereas cash returns were more subdued at 3.8%. Their global counterparts as per the global bond index returned 1.6% in Rands, whereas global emerging market bonds delivered 6.5% in Rands. Some of the global asset class performance was cushioned by a weakening rand, which depreciated by approximately 8.0%.
The question now remains whether we will see more of the same from these asset classes in 2022 or whether we should be rethinking asset class exposure given the heightened risks in both the global economy and, by extension, global markets.
Asset allocation outlook
Local Asset Classes
SA Equity (Marginal O/W) – we have seen very good returns from SA Equity and while that is the case, the valuation of SA Equity remains attractive. The one-year forward P/E multiple is currently at 11x earnings, with the mean being 13.5x. Even though earnings are set to slow over the next year, the expected return is still for a reasonable double-digit return. We will look to reduce SA Equity marginally, should returns continue to move upwards.
SA Bonds (Marginal O/W) – SA Bonds continue to offer value with the ALBI yield at 9.96%. The fiscal positioning of SA has also improved and even though interest rates are set to rise by three or four 0.25% rate hikes, the relative value of SA Bonds against other EM or DM Bonds makes them attractive. The real return is also 4% in excess of inflation, which is historically higher than the 2.5% real return expected on a long-term basis.
SA Property (Neutral) – SA Property has finally turned the corner from a growth in dividends and relative value to bonds. We are still quite concerned about the long-term prospects for the asset class, but are happy to assign a neutral exposure to it, given the discount that still exists in the property market and the dividends per share which have started to improve.
SA Cash (Marginal U/W) – We remain negative on cash rates and would allocate to this asset class if we were worried about the return prospects for other local or foreign asset classes. There is still quite a large negative real return from cash relative to inflation, and even with the expected interest rate hikes of close to a percent it still puts investors behind inflation.
Global Asset Classes
Developed Market Equity (Marginal O/W) – We have been much more exposed to this asset class post the pandemic and still believe that there is momentum in this asset class. While US equity remains expensive, growth prospects still look good and the other developed markets such as Europe and Japan remain attractive. We will look to reduce our exposure to risky assets as we get into the year, should our view materialise. The MSCI World Index P/E is at currently 23.2x compared to the long-term P/E of 21x, but this is skewed by the expensive US Equity market.
Emerging Market Equity (Marginal O/W) – EM Equity is significantly more attractive than the DM Equity, with a forward P/E of about 13x compared to the long-term P/E of 15.5x. Earnings are likely to be more robust given the lag we have seen in emerging markets as a result of harsher lockdowns last year and the catch-up that needs to happen.
Global Bonds (U/W) – We continue to believe that, with interest rates set to rise, yields at the longer end should rise as well, as they have been anchored by zero interest rates at the very short end of the yield curve. We will look to close our underweight once this transpires, but negative real return persists and we cannot get excited about this prospect. Warren Berriman
Managing Director - Alexander Beard RSA (Pty) Ltd.
Report taken from Glacier Invest | IC Quarterly Meetings (January 2022)