Investing: Lessons from 2022

Andriette Theron, Head of Research at PPS Investments

2022 was a challenging year for investors. At the start of the year, there was a sense of optimism around the world. Markets anticipated that COVID-19-induced global supply chain constraints would abate.

The US Federal Reserve (US Fed) would continue tightening interest rates but would likely remain accommodative and global growth was expected to remain above trend. But a different story played out.

Global supply chain issues were exacerbated by the Russian invasion of Ukraine and China’s zero-COVID policy. Global inflation continued to surprise the upside. Central banks globally raised rates to combat stubborn, multi-decade high inflation. Global growth slowed and expectations were downwardly revised. These forces driving the markets led to uncertainty, negative sentiment, and a broad market sell-off.

A phenomenon that we experienced this year, for the first time in over two decades, was a positive correlation between stocks and bonds leaving few places to hide during the market sell-off. This emphasised the important role cash, despite low real yields on offer, can play in a diversified portfolio.

A fundamental change that we made in 2022 was to recalibrate our long-term strategic asset allocation (SAA) to take advantage of the increase in the allowable offshore limit. This allowed us to further diversify South Africa-specific risk across our portfolios, having equal weight in local and global equities at neutral.

As the year progressed, we became increasingly concerned about the headwinds facing the global economy and that these were not adequately priced into financial assets. Given increased uncertainty, we tempered the high conviction views that we held at the start of the year bringing our portfolios more in line with its long-term strategic asset allocation (SAA).

Internal discussions were initially focused on when to reduce exposure to global equity and ensure the appropriate mix between local and global equities, especially given the relaxation of prudential limits to 45% offshore. As the year progressed, the focus shifted toward whether markets have sufficiently priced in the negative outlook, or even priced in too negative an outlook supporting an increase in global equities.

Throughout the year, South African assets continued to offer investors a good entry point. We have maintained a positive view on South African bonds and equity throughout the year largely premised on attractive valuations. Trading at a single-digit forward PE multiple, the SA equity market continued to offer significant value relative to its own history, as well as relative to its emerging and developed market peers. The South African bond market also continued to offer investors double-digit yields, well in excess of inflation.

In the past three years, we’ve experienced very different drivers of portfolio returns, which highlighted the benefits of investing in a portfolio that is not only diversified across asset classes but also manager strategies because the asset classes and investment strategies that performed well in 2022, were generally not the winners in 2021.