South African investment landscape
The macroeconomic outlook was murky throughout the year, challenging the outlook for risky assets. We therefore maintained our relatively cautious portfolio positioning stance, favouring fixed income assets (including cash) over equity and property. On valuation grounds, domestic asset classes continued to look attractive, but persistent domestic economic and political malaise resulted in these asset classes underperforming their global counterparts.
High interest rates and sticky inflation
Interest rates and inflation were among the biggest themes over the past year which impacted our asset allocations. We were cautiously positioned heading into 2023. Our underweight exposure to global equity was driven by the view that tighter monetary policy posed a risk to global economic growth. While the possibility of a US recession still remains, it appears more likely that any recession will be milder than previously expected. This, in addition to the Federal Reserve Bank’s (Fed) more dovish stance towards to end of the year, led to us closing our underweight position in global equities.
Having started building a global bond allocation in November 2022, we used the spike in bond yields during the second half of the year to add to our exposure to this asset class. Although we are less optimistic than the market about the extent of near-term rate cuts, we do believe the interest rate cycle may now have peaked, providing the possibility of strong future returns from this asset class.
2023 provided a broader opportunity set
For many years, equities were the only viable global investment option, but now both cash and bonds offer the prospect of delivering inflation-beating returns. Within our house view we had a favourable view on cash for most of the year, which protected us from market volatility and provided optionality, enabling us to close our underweight position in global equities towards the end of the year. A meaningful allocation to offshore assets contributed positively to our performance, given continued rand weakness over the period.
The 10-year US Treasury yield rose to levels last seen in 2007, as markets adjusted for the reality of a higher-for-longer interest rate environment. We took advantage of this opportunity by increasing our global bond allocation, taking an overweight position relative to our SAA. Even though cash investments still look compelling today, a Fed pivot should be positive for global bonds and equities on an absolute and relative basis.
An alternative perspective
Towards the end of 2022, we made an initial allocation to a mix of hedge fund strategies in institutional portfolios. The inclusion of hedge funds as a diversifier to domestic equity risk contributed positively to absolute and relative returns over the past year.
We are currently assessing various strategies and ways to deploy capital which makes a real and meaningful impact on the local economy. Based on our engagements with various industry players over the last 12- to 18-month period, we believe we can achieve this objective by investing in private markets. Over time, we expect our allocation to alternatives to grow in line with our goal to invest with purpose by doing our bit in creating a world worth living in.
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