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Outlook for 2022

22 February 2022 David Crosoer, Chief Investment Officer at PPS Investments

The global outlook appears particularly uncertain today. Markets are preoccupied with how quickly central banks will need to raise short-term interest rates, and remove the unprecedented monetary stimulus put in place to mitigate the impact of the COVID-19 pandemic.

Closer to home, South Africans are dealing not only with monetary tightening from the South African Reserve Bank (SARB) but digesting the implications of the first instalment of the Zondo Commission, and whether this might finally be the catalyst for much needed structural reform.

As is often the case, it’s worth reminding oneself that the start of 2021 was equally uncertain, and many investors could not have foreseen that the South African (SA) economy and stock market could have outperformed expectations so emphatically. So, while it’s somewhat blithe to state that the future is always uncertain, it is important to remain disciplined and diversified, and stick to one’s investment process.

What do we expect in 2022?

Late in 2021, the US Federal Reserve announced its intention to relax its quantitative easing programme, and start increasing short-term interest rates, perhaps as soon as March 2022. The change in policy threatens to remove a tailwind of excessively low interest rates that has been in place since the 2008 Global Financial Crisis. If sustained, it could have major implications for the pricing of most financial assets, which has been boosted by excessively low interest rates, and the policies of central banks globally.

Looking ahead, at least three interest rate increases from the US Federal Reserve are expected this year. The normalisation of short-term interest rates from unprecedently low levels, and possible need for central banks to hike more aggressively than anticipated, could introduce substantial volatility into the pricing of financial assets. In all the hype, it’s easy to forget that the US Federal Reserve has deliberately been trying to get inflation back into the system, although the current spike is more substantial than it anticipated.

In fact, the market is looking through the current inflation, with consensus that neither inflation nor interest rates should settle significantly above 2% in the medium term. While such tightening may have implications for the pricing of some inflated financial assets, it’s unlikely to derail the economic recovery and could in fact create opportunities for active asset managers to exploit.

It may be too soon to say that the US Federal Reserve will not pause in its tightening cycle if the market reacts poorly to further tapering or inflation fears prove overblown. While this needs to be monitored closely, we do not anticipate that the US Federal Reserve will have an aggressively tightening cycle.

The SARB indicated its intention to raise interest rates this year, with a possible 2.75% further hike, even if inflation proves to be well-contained. Such a trajectory is arguably unnecessary, especially if the US continues with negative short-term real interest rates. On balance, our view is that SA cash will remain unattractive compared to other SA asset classes.

We expect the global growth environment to remain positive for riskier asset classes and global growth to remain above trend. While consensus forecasts expect SA economic growth to revert to below 2% p.a. over the medium term, there is scope for positive surprises, particularly if some of the confidence-enhancing recommendations from the first instalment of the Zondo Commission are implemented. Moreover, the transition to a greener economy may provide an opportunity to reduce dependence on Eskom and China and attract additional investment. South Africa produces some of the commodities required for the transition, and the decarbonisation of our economy may provide a relatively quick win for far-sighted foreign investors.

In summary, we think it is too soon for investors to throw out the lessons learnt over the past decade and take substantial risk off the table. While the future is always uncertain, we believe there are still considerable opportunities for asset managers to exploit. Our disciplined multi-manager investment process is now in its fifteenth year and remains diversified across asset classes and managers to best deliver consistent outcomes to our clients.

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