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Interest rates have continued to hike, but the likelihood is that we are nearing the peak in interest rates as inflation has globally reached an inflection point. Over the last 3 months inflation has consistently come off in both the major economies of the world and in South Africa. Performance of markets globally over Q4 2022 had essentially started pricing this positive news in and the All Share Index returned 15.1%, with the MSCI World and Emerging Market Indices returning 9.4% and 9.2% in USD terms respectively. Local property also had a significant 19.3% return over the quarter as bond yield also came off and saw the All Bond Index return 5.7%. Globally, with equity markets rallying, the Global Bond Index also rallied, returning 4.5% in USD terms. The rand also strengthened in this risk on environment, appreciating 5.6%. The obvious question is whether this enthusiasm can continue after seeing a market correction (or mini crash) in 2022? Our view is that this enthusiasm is possibly warranted from a valuation perspective, as earnings haven’t fallen in a heap equity market (globally at least). That said, earnings are likely to come under pressure over the next 6 to 12 months as we continue to see slower economic growth which started last year. It is likely that earnings will be negatively impacted, given what has been priced into markets. We have also not seen the peak in interest rates and will continue to monitor the US Federal Reserve’s testimony on the trajectory of interest rates into 2023 and beyond. Should they continue to hike interest rates in the face of a slowing inflation, that might spook markets, signalling they might have overdone the hiking cycle. Below is a summary of our asset allocation views:
From an economic cycle perspective, we still think we are in the “slowdown” period where being a bit more defensive makes sense. Thus, we remain cautious of this exuberance and while we are benefitting from it, we want to remain pragmatic and look for opportunities to reduce overweight exposure to equities and either increase exposure to enhanced cash strategies such as flexible income and/or offshore as we continue to see the rand strengthen. Over the longer term, we want to be more exposed offshore and with equity risk as we believe the valuation is quite attractive and its earnings seem to be a bit more defensive relative to the local earnings. Investment Compass
Warren Berriman
Managing Director - Alexander Beard RSA (Pty) Ltd.
Article Taken from Glacier Invest | IC Quarterly Meetings Q4 2022