Global financial markets suffered a setback this quarter, after a strong year in 2021. In a further dent to sentiment, geopolitical tension between Russia and Ukraine culminated in a full-blown invasion of Ukraine. Back home, the environment was more benign, with the equity market proving resilient.
How did the markets perform?
The South African (SA) equity market, as measured by the FTSE/JSE Capped SWIX, bucked the global trend by posting an impressive rise this quarter (+6.7%) despite global negativity, building on its solid 2021 performance. Financials (+20.2%), led by banks, were the best performers, followed closely by Resources stocks (+18.2%) which benefitted from strong commodity prices, while Industrial shares declined for the quarter (-13.9%), as Naspers and Prosus came under pressure. SA government bonds were up, with nominals (+1.9%) outperforming inflation-linked bonds (+0.3%), while SA listed property on the other hand declined (-1.6%).
Although most major domestic asset classes were up this quarter, foreign asset classes were mostly down, with their weakness compounded by the local currency’s strength. Foreign equities fell in rands (-13.4%), with both developed markets (-13.2%) and emerging markets (-14.8%) coming under pressure. Growth stocks were among the worst performers, but even relatively cheaper European markets fell sharply, given the conflict in Ukraine. Outside of equities, global listed real estate also declined (-12.5%), while global bonds (-14.4%) provided no safety, given the steady rise in US Treasury yields over the quarter to levels last seen in 2019.
How are the portfolios positioned?
At the start of the year our multi-asset portfolios were positioned to benefit from expansionary economic conditions by holding a fair amount of domestic and foreign equity. This is after having altered the mix of equities across client portfolios last year, by up-weighting SA equity and down-weighting foreign equities somewhat. SA equity’s value-proposition still lies in its “cheapness”, however, foreign equity’s attractiveness, which relied more on the strength of the global cycle, is certainly being challenged.
Our view is that we are now late-cycle and that a more cautious stance is warranted, and it is likely that we will further trim exposure to growth assets. This is being weighed up against the increase in the allowable foreign investment limits to 45% for pension funds, as announced during the National Budget Speech in February, which will allow the portfolios to hold structurally more offshore going forward, improving home-bias risk.
The decision to reduce equity should never be taken lightly, given its importance in delivering on the portfolios’ long-term growth objectives. The intention is therefore not to be underweight total equity at this point, but rather to reduce the current tactical overweight to a neutral level compared to one’s strategic asset allocation, in response to the deteriorating outlook. Global bond yields are rising to levels that are almost viable, and cash rates are also rising, and while neither are yet attractive in real terms, it is likely that the portfolios will reflect a more balanced foreign asset allocation in the future.
Looking ahead we acknowledge that the volatility witnessed across financial markets so far this year reflects the high degree of uncertainty and the broad range of potential outcomes we could face. In this environment where conviction is low, it makes sense to tone down any bold tactical views and to move closer to one’s long-term strategic asset allocation, as the current market regime evolves. This is how we will be approaching the months ahead, while taking comfort in our diversified multi-manager approach that seeks to deliver compelling investment outcomes over the long term.
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