At a glance – our asset class views
Please be aware that there are risks in simply implementing these views into a portfolio without carefully considering the dynamic nature of the environment, how changes impact each asset class and the unique needs of each client.
While our long-term real return assumptions are derived assuming that markets are in equilibrium, we do not believe that this is the case all the time. We, therefore, take views (tactically over/underweight) on relative asset class performance over three to twelve months, specifically ignoring shorter-term noise, and not relying on long-term expectations i.e. we need to see the catalyst for the relative performance.
Domestic asset classes
- The equity market continued to slow down in Q3 relative to the highs experienced in Q1. The anticipated slowdown in China hurt most commodity prices, leading to a 3.6% sell-off in resources. The technology sector pulled back 19.2% due to regulatory concerns, particularly in China. Financials performed well as investors continued to take profits from last year’s winners, moving into some of the “beaten-up” sectors.
- We trimmed our overweight equities position in acknowledgement of potential volatility leading up the US Fed tapering but maintained the overweight position. Valuations for SA businesses remain in favour and expected earnings remain high, closer to 10%. Coupled with a forward dividend of 5.2%, this appears attractive. In addition, the forward PE of sub 10x is not too demanding.
- The market had another strong quarter, rallying 6.5% in line with other SA sensitive companies. Property has gained 58.1% over the past year as many investors took advantage of attractive valuations in March 2020 when most companies were priced for bankruptcy.
- We continue to think the risks for property are balanced – on the one hand, office space remains challenged as ‘working from home’ has become the new norm and vacancies have shot up. Foot traffic in the centres looked to be improving but the third wave of COVID in South Africa derailed this somewhat. On the other hand, rental collections are approaching 100% and companies have lowered pay-out ratios while cleaning up their balance sheets.
- The recent unrest in KZN and Gauteng hurt sentiment but had limited impact as it was largely isolated to a few centres in those provinces.
- The bond market was largely flat in Q3, gaining 0.4% as the yield curve flattened a bit. Bonds gained 12.5% in the past year as investors started paying attention to the attractiveness of bonds, particularly the long end of the curve.
- We bought bonds in Q1 when yields sold off. The 10-year SA government bond weakened to 9.9% in March, providing an opportunity to add to our overweight position. Since then, it rallied all the way to 9.0% before selling off to 9.6% in September.
- We continue to like the higher yields offered by ultra-long bonds but are starting to be concerned about the impact of higher US bond yields as the US Fed reduces its $120 billion a month bond-buying programme. The higher oil price – currently above $80 a barrel – and rand weakness have recently started to be a threat to inflation.
- Short-dated bonds rallied 1.5% in Q3 as inflation concerns resurfaced. They have gained 4% over the past year.
- We have an overweight income position due to its relative attractiveness when compared to cash. Yields on short-dated bonds are at 5.3% which is 160 basis points higher than the 3-month JIBAR’s 3.7%.
- Default asset class – following the 300 basis point interest rate cuts by the SARB in 2020, cash rates remain low. FRAs are only pricing hikes in 2022 and the September decision by the SARB to keep rates unchanged was unanimous, suggesting that rates could be lower for longer. Having said that, the SARB’s rhetoric has changed a bit in recent weeks.
Global asset classes Equities
- Global equities pulled back 1.0% in Q3 in US dollar terms but are still significantly up in the past year (+27.9%).
- Most of the drivers of the recent rally – loose monetary policies, lower earnings base set in 2020 and the strong economic recovery in 2021 – seem to be behind us. Rising bond yields are threatening equity valuations.
- Given the slowing tailwinds, we are marginally overweight equities. The forward PE of 19.4x or the price to book of 3.1 is a bit demanding.
- Global bonds lost 0.9% in Q3 and are down 0.4% over the past year.
- Despite this underperformance, we do not believe that they currently offer value. Market expectations are that the US 10-year bond yield will rise above 1.5% by year-end and inflation pressures in the short term remain.
- Default asset class – we use global cash to increase/decrease offshore exposure. We recently increased our cash position as we thought it was prudent to take some risk off the table i.e. reduce global equity exposure.