Where is the value?
The global investible universe is a risky place over the short to medium term over any time period this is especially true now.
Global
Global markets started the year positively but are still facing headwinds so near-term economic growth continues to be threatened. The outlook for global economic growth is reduced over the medium term. Inflation and interest rates will average higher than in the last decade for the foreseeable future. Geopolitical risk and globalization continue to prevail, and nobody knows what the short to medium-term outcome will be. While asset managers take the macro environment into account, they do not use this as a starting point to put a portfolio together. Now more than ever, the focus is on diversification into regions and specific sectors.
Local
South Africans have to take global risks into account as well as the challenges we as a country are currently facing. The asset managers are looking at both these scenarios and how they will affect the various asset classes they can invest your money in. They have to manage the downside risks and at the same time give us inflation-beating returns. Looking at history one realizes how difficult it is to forecast macroeconomics – the asset manager’s role is to build a robust portfolio that can cater to more than one outcome in case of surprises – some of which can be very big.
General strategies
Looking at the past year the mood has been very bearish (low growth scenarios). The war in Ukraine triggered oil and food price spikes, which caused inflation all over the world and the central bankers who had kept interest rates too low for too long were increasing their interest rates where they could. They all focussed on the next data readings so who is going to do what. During that time the cash levels of global fund managers increased because they were scared anticipating a high probability of a recession. Global asset managers started selling out of equities.
It is prudent therefore for asset managers to look a little beyond the possible recession most of them feel that inflation is now at its peak and slowing down. However, interest rates are still high, and the general feeling is that they will only start to really reduce late in 2024 into 2025. A positive surprise was that China abandoned its zero Covid policy – this has positive spinoffs for the global economy. Both the global and local stock markets are up around 20% since August last year. The US regional bank turmoil is not seen as a crisis but does remain a concern as banks are important players in the economy and they are being actively watched. SA growth prospects however have reduced more than expected and it is not confined to economics only as we all know.
Where to invest
On balance, the outlook for global stocks and portfolios looks slightly better than South Africa especially when we look at the next 24 months. The counter to offshore investing currently is the exchange rate, however, offshore investing is not just about currency. One needs to look at the returns offered and the higher choice of investible asset classes. I have included a note from a foreign exchange group on trying to time the rand which makes for interesting reading.
Conclusion
We need to leave the asset allocation and the search for the most appropriate investment opportunities to the fund managers as they are the ones that study the markets and sectors daily. Our role is to place you in funds that are best diversified and offer the greatest opportunity of real returns and ensure that the fund managers are following their mandates.
