Opportunity for active managers to show their worth as global markets present less-synchronised, multi-polar growth

Asset managers will face new challenges in 2022 as the almost uniform post-pandemic economic rebound is replaced by slower, less-synchronised, multi-polar economic growth, with wide divergences between countries and regions. In this environment, asset managers will need to stand out for their ability to identify the sweet spot of asset class returns and allocate investors’ funds accordingly.

“The world emerged from the pandemic with synchronous growth, but we expect the growth and return paths of major global markets to diverge next year,” says Jason Swartz, Portfolio Manager at Old Mutual Investment Group (OMIG).

Swartz attributes this uneven growth recovery to three potential sources. “The impact of different vaccine rollouts and approaches to the pandemic, where even developed countries including Japan, Australia, South Korea took an approach to continue to isolate and implement hard lockdowns, which has impacted the ability of economies to reopen,” he explains. “Secondly, divergent policy support saw the US and many rich nations able to stimulate their economy through massive fiscal spending, while many poorer countries – particularly in Africa – had to rely on IMF’s liquidity programme and debt relief to weather the pandemic. And lastly, countries that rely on tourism to drive their economies have been adversely affected.”

The asset manager expects all-around slower economic growth in 2022, and a return to longer-term country growth trends in 2023. The growth and return divergence that asset managers face is illustrated by Q3 2021 equity market performances, with global equities trading 1.1% lower and the US flat, while China equities were down 18% and Japan ground out a 5% gain.

Local investors cannot afford to build portfolios with a narrow South African view versus the world view, because offshore asset allocation requires a careful assessment of dozens of multi-polar markets with wildly divergent return profiles. Furthermore, asset allocation decisions must be made with due consideration of the differing return outlooks for China versus emerging markets, the US and other global economies.

“China’s 2020/21 recovery was ahead of the curve in terms of the global cycle,” says Swartz, before observing that the world’s second largest economy was at a crossroads entering 2022. “Chinese policymakers are trapped between taking decisions to accelerate the domestic economy or orchestrating a hard landing in support of China’s common prosperity goal.”

The US financial markets have taken investors on a wild ride since April 2020, pressing to new highs and reaching valuations that many commentators feel are overheated. “The overheating of the US economy exhibits as higher inflation and a tightening labour market,” says Swartz, who suggested that US policymakers might remove liquidity from the markets far sooner than expected. The high-growth technology shares that dominate US financial markets will likely underperform in an environment where yields are going up.

“China and the US are almost at opposite sides of the global cycle, in that the US is thinking about tightening liquidity and raising rates, whereas China is wrestling with accelerating their economy in the face of an over-indebted property market, pressures to shift to a green economy, and their common prosperity goals,” says Swartz.

But emerging markets are more difficult to read. It is possible to lump all emerging market constituents into a single basket and lament the 8% decline in equity market valuations over the latest quarter; but the reality is that Brazil, Russia, South Africa and individual emerging countries in Africa, Asia Pacific and South America have unique growth prospects.

Global events will continue to impact South Africa’s economy, which remains heavily exposed to developments in its major trading partners.

“For SA investors, the implosion of Evergrande, the China-based property developer, will have significant implications for our commodity markets, and 2022 will be a tougher year as a result,” says Swartz. For example, iron ore prices fell 44% over the third quarter of 2021.

Meanwhile, global energy shortages sent the price of coal up 220% over the year, alongside big spikes in natural gas and oil. This has been great news for companies like Sasol, but not so great for South African consumers, who face record petrol prices in November 2021.

China’s ongoing regulatory crackdown on data privacy, monopolies and technology firms will also have indeterminate long-term effects on the earnings of the JSE’s largest benchmark constituent, Naspers / Prosus, which bled around 20% in value over the latest quarter.

Swartz unpacks what developments in China and the US mean for local asset managers, particularly those that have to comply with the regulation 28 rules on offshore allocations. “We have been overweight South African assets versus global assets recently and believe that SA cyclical companies will do well over the short-term; but we cannot ignore the impact of structural uncertainties on the local outlook,” he says.

Domestic asset allocators will need to focus on tactical exposure to cyclical equities, which remain the best option for return, despite lower growth prospects. “We are happy to have exposure to SA bonds too as the real yields on offer remain extremely attractive relative to cash,” he says.

Active managers can once again prove their worth by selecting the best growth and return opportunities from a dwindling set of local listed opportunities.

“The environment we are operating in is dominated by marginal moves at a market level, but also larger opportunities for selection that lie underneath,” says Swartz, who noted that OMIG would be sticking with its overweight position in South Africa facing companies, which remains an attractively valued asset class.

“For global investors, Q3 2021 marked a period where the standard 60:40 equity/bond portfolio stopped delivering, as both global equities and global bonds fell marginally in the quarter; the result is that we will all have to hunt harder for our returns,” concludes Swartz.