Investment themes to give advice by
Being well-informed about the global macroeconomic outlook and emerging investment themes is one way for financial advice professionals to better serve their clients. Diversified financial services provider, Alexander Forbes, recently hosted a Hot Topics 2021 webinar as part its integrated offering to make a difference in the lives of financial advisers and retirement fund trustees. The group’s chief economist, Isaah Mhlanga, kicked off the webinar with an overview of key economic indicators as we neared the end of the first quarter of 2021.
The third and fourth waves loom
“The global environment is still dealing with pandemic; we except at a bare minimum a third wave globally and a fourth wave locally,” said Mhlanga. Despite the constraints of an ongoing pandemic, Analysts expect global growth of 5.5% in 2021 compared to an alarming 3.5% contraction through 2020. The European Union (+4.2%); United Kingdom (+4.5%), United States (+5%) and China (+8.1%) are all growing above their long term trend. South Africa, meanwhile, is pencilled in for 3.2% growth next year and will grow at less than 2% in each of 2022 and 2023.
Investors have welcomed the rebound in GDP growth; but are concerned about the inflationary impact of record fiscal and monetary policy stimulus. But Alexander Forbes is not convinced that we will face an inflation problem. They say that global inflation looks set to average 3.4% in 2021, with advanced economies picking up from 0.7% this year to 1.5% in two years’ time. It will therefore be some time before central banks respond to inflation pressures with small hikes in interest rates forecast earliest Q4 2021.
South Africa’s economic prospects are better than expected. Alexander Forbes believes that domestic inflation will remain at around 3.8% this year, increasing to 4% in 2022. Mortgage accountholders can thus expect the repo rate to remain at 3.5% for some time, though we could see an increase to 3.75% early 2022. Mhlanga welcomed the 2021 National Budget as positive for private investment, due the 1% reduction in the corporate income tax rate, and pro-growth, thanks to the R2.2 billion income tax relief for households. This relief, coupled with a decision not to raise R40 billion in additional taxes this year, will boost consumption expenditure.
A shrinking listed company universe
Alexander Forbes used its Hot Topics 2021 webinar to reiterate the challenge facing asset allocators as South Africa’s listed company universe shrinks. They pointed out that the number of listed companies had reduced from 900 in the early 2000s to just 350 by the end of 2019. Asset managers are hard pressed to invest a growing stream of investor capital into a market with fewer opportunities and beset by concentration risk. “The only solution for investors is to look outside the listed market,” said Mhlanga.
It is hoped that investments into unlisted markets will reach neglected sectors of the economy. South Africa is underinvested in agriculture, construction, energy and manufacturing compared to 15 of its emerging market peers. This underinvestment reflects in South Africa’s lacklustre 10-year GDP growth average of just 1.7% compared to 3.7% on average across the 15 countries. It is also clear that the country’s long term savings sector is reinforcing the theme by being benchmark cognisant, because most benchmarks are underweight these sectors too. Opening up unlisted markets will make it easier for multi-asset managers to diversify returns and achieve non-benchmark exposure to the economy.
“Having allocations to private markets and hedge funds put our portfolios and client portfolios in good stead during the market volatility that exhibited in the first half of 2020,” said Lebo Thubisi, Head: Manager Research at Alexander Forbes Investments. He shared six investments themes that would support investment decisions over the short term, starting with the global growth impact that accompanied Covid-19 vaccine roll outs. A second important global theme attaches to the election of Biden as US President. “The pundits are saying that corporate taxes will have an upward trajectory [under Biden], having a negative impact on US earnings, and introducing risk to offshore equity markets,” said Thubisi.
Six investment themes for 2021
Three of the six investment themes support a push into private market assets. First, the continued focus among asset managers and pension fund trustees on environmental, social and governance (ESG) investments. We have reached a point where the argument about investment returns at the cost of social returns holds little water. Second, infrastructure investment is also topical following recent amendments tabled on Regulation 28. “The industry has received these amendments positively and in some quarters surprisingly so,” said Thubisi. “Minister Mboweni has identified infrastructure as central to the plan for reinvigorating the economy”. And finally, both ESG investing and infrastructure investing are being led by policy.
The theme asset managers will be most focused on is described as an early market shift into sectors such as energy, financials and resources, which do well under the prevailing macroeconomic conditions. There has also been a noticeable return to value strategies from growth and momentum strategies. How do these themes translate into asset allocation? Locally, Alexander Forbes is overweight equities and cautious in real estate. They are closely monitoring value opportunities and positioning for the resurgence of resources, which is seen as a generalised emerging market theme. Globally, the asset manager prefers real assets over cash.
Beware the rand diversification mishap
Mhlanga’s parting shot was to caution advisers and trustees against seeking too much offshore exposure for their clients. “Most South Africans are trying to diversify rand risk; if they increase their exposure offshore too much they may inadvertently increase this risk,” he said. The JSE, which already offers high exposure to companies with offshore earnings, is by and large an offshore market play. Market volatility will remain for as long as global fiscal debt levels remain high. “Hedge funds will continue to make a meaningful impact and there is a clear consensus that private markets will continue to outperform public markets on a forward view,” concluded Thubisi.
Writer’s thoughts:
The recent focus on infrastructure and consequent surge in resources demand seem to indicate that South African markets will deliver better than average returns in coming years. Given this good news we wondered whether local investor portfolios were still appropriately weighted offshore. What is your latest thinking on the offshore / onshore debate? And are your clients still keen to maximise their offshore exposure? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].
