Experts weigh in on
Climate change, technological shifts, global inflation, and more, are all redefining the investment industry and making the investment landscape increasingly complex.
FAnews spoke to Kondi Nkosi, Country Head for Schroders in South Africa and Jacques Plaut, Portfolio Manager, Rory Kutisker-Jacobson, Portfolio Manager and Thalia Petousis, Fund Manager at Allan Gray about the investment industry in 2022.
Interest rates and global inflation
Kutisker-Jacobson said the Federal Reserve approved its first interest rate increase in more than three years and signalled its intention to keep hiking rates throughout 2022, and possibly into 2023. As of 31 March 2022, the yield on 10-year government bonds in the US had increased from 1.5% to 2.3%, causing those same bonds to generate a negative return of 7.2% in US dollars. Higher interest rates have also meant higher discount rates, with a number of highly priced companies falling significantly and the S&P 500 down 4.6% in US dollars.
“At this stage, we do not know whether global inflation will prove to be transitory or more persistent in nature. We do know that developed market government debt is at record levels and that the real yield on long-dated government bonds continues to be negative in many countries. We also know that the average earnings multiple one is paying for US equities remains high relative to history. As a result, we continue to see substantial upside in our offshore investments relative to overall global asset prices. In contrast to global bond markets, the 10-year government bond in South Africa is providing real returns, with a benchmark rate now in the ballpark of 10% (real rate above 4%). The risks in South Africa are well known, but one is arguably being compensated for these higher risks at today’s prices,” said Kutisker-Jacobson.
“Furthermore, over the past few years, there has been huge pressure on companies to close and reduce investment into fossil fuel operations, coal in particular. In theory, this should drive a positive outcome from a climate change perspective. Unfortunately, as a global society, we have been poor in terms of the speed and scale at which we have made greener alternatives a viable reality. As consumers are reluctant to reduce their overall energy needs, demand has remained sticky. With demand remaining elevated and supply under pressure, the coal price has rallied materially over the past 18 months. This has been exacerbated in the short-term by COVID-19 supply disruptions and the events that unfolded in Ukraine, with the related sanctions on Russian oil and gas,” concluded Kutisker-Jacobson.
The inflationary curve
“In the first quarter of this year, the prices of oil, gas and wheat had each risen at their respective peaks, by close to 70%. The Russia-Ukraine war not only took a giant of the exporting industry out of the market but also further disrupted global supply chains in a range of commodities. Uncertainty about the severity of the war has sparked debates around food security, famine and rioting, particularly in vulnerable economies. In many markets, the cost of a tank of fuel is rising many multiples faster than the pace of wages,” said Petousis.
“During prior periods of high inflation, money market investments have only offered good value if central banks have raised rates by the necessary quantum to offer real, positive, inflation-adjusted returns. Where does the world find itself now? US interest rates are projected to rise to circa 2.3% by the end of the year. If one contrasts this against current US consumer inflation of 7.9%, the real inflation-adjusted return is negative 5.6%,” emphasised Petousis.
“The Fed and various developed market central banks have fallen so far behind the inflationary curve that whether they move by 25 or 50 basis points at each of the next few meetings may be of little consequence if the terminal interest rates they arrive at are too low. Despite Fed Chairman Jerome Powell attesting to the fact that he will do whatever it takes to contain inflation, we must face the uncomfortable truth that with US debt to GDP sitting north of 130%, it might mean bankrupting the system, making it far less likely that such boldness is favoured,” continued Petousis.
“While locally the South African repo rate has risen, investors with a higher risk appetite should consider a diversified multi-asset fund investment, with at least some equity exposure and inflation protection,” concluded Petousis.
Technology stocks
For technology investors, Plaut said that the mood has shifted from euphoria to caution. “This can be seen most easily in the performance of stocks like Peloton, which sells exercise bikes connected to the internet, and which is down 84% in US dollars from its peak a little over a year ago. Other technology darlings like Zoom, Delivery Hero, and Beyond Meat are all down more than 70% from their respective peak dollar share prices. In most instances, the fundamentals have not changed that much. Delivery Hero, for example, reported slightly worse guidance for 2022 than what analysts had been hoping for – which hardly seems like a sufficient reason for the stock to lose nearly EUR10bn of value. The change in sentiment seems to be the overriding factor.”
“Chinese technology companies have also suffered. From their respective peaks, Meituan, Pinduoduo, JD.com, Alibaba, and Tencent have all lost more than 40% of their value in dollars. The fall in Tencent has affected Naspers, which is down 57% from its 2021-rand peak. And this, during a time when almost every other large stock on our market delivered a positive return,” added Plaut.
“The technology sell-off is a reminder that when you pay a high price for a business, you had better be right about its growth prospects. Investors can reduce their odds of losing money by being careful not to pay too high a price for growth, especially during times of very positive sentiment,” continued Plaut.
“Technology stocks are now a large part of the global universe. There is a lot of money to be gained or lost in this sector. But for South African investors, a large portion of the stocks in our universe are directly or indirectly exposed to China, and getting this call right, is crucially important. Large global stocks like British American Tobacco and AB InBev have very little exposure to China, should hold their value and protect the portfolio against Chinese setbacks,” concluded Plaut.
ESG criteria
The societal, political and regulatory focus on sustainability and sustainable investment is intensifying, according to Nkosi.
“Issues like climate change, biodiversity loss, inequality, discrimination and corruption present risks and opportunities to businesses and investments, and in many cases, will require significant and sustained capital reallocation. Asset managers are unavoidably at the centre of those pressures and can play a critical role in tackling them,” he said.
Historically, Nkosi said the purpose of asset management has been capital allocation. But what used to be one- or two-dimensional is now multi-dimensional.
“First, what makes a good risk-return outcome has changed. Integration of Environmental, Social, and Governance (ESG) criteria in investment decisions is the new normal. Second, there is a new dimension next to backward-looking measures risk and return: impact. Third, the asset managers’ role in connecting savers with capital to investments that need capital is waning in most markets, relative to their increasingly important role of stewardship and oversight over the investments they have made,” commented Nkosi.
“It is important to make sure we always circle back to why we do what we do. We are in the business of helping people achieve their goals, desires and dreams. Our efforts have a real and direct impact on people. It is a privileged position in which we find ourselves and we must not forget that,” concluded Nkosi
Writer’s Thoughts
The trends in the investment landscape provide an interesting take for portfolio construction, before and after the global pandemic. Do you believe the rest of 2022 and 2023 will bring about strong global GDP growth, with fiscal stimulation driving economic activity? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts myra@fanews.co.za.
