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 tactical views on the relative performance of each asset class over a three to 12- month period, specifically ignoring shorter-term noise and not relying on long-term expectations. Having identified a specific factor or catalyst for the relative out- or under-performance of an asset class, we then rate it on a scale of underweight/neutral or overweight and position our portfolios accordingly.
*Floating rate instruments of maturity longer than one year.**Views expressed for each asset class are subjective and are for the asset class as a whole. All views are as at 30 June 2024.
Domestic asset classes
Equities
- We started the year with a marginally overweight position. Following the sell-off in January, we added to our overweight position as we thought the market was overly punitive in its pricing of SA idiosyncratic risks – the elections in May, SOEs, loadshedding etc. When equities rallied in April and May, we used the opportunity to lighten our position but remain overweight.
- SA equities pay a 4.3% dividend and trade on a forward PE of 10.7x, which is very attractive. In addition, positive developments from the government of national unity (GNU) and interest rate cuts later in the year are likely to provide more tailwinds.
Listed property
- Despite the recent rally, listed property is up only 0.6% over the past 5 years, carrying the scars of the collapse of the Resilient group of companies in 2018. We remain overweight domestic property as we think it is still significantly undervalued with positive tailwinds. The sector is trading at a 30% discount to NAV.
Bonds
- We have been positioned for a rally in bonds for some time now, which has worked well for us to date.
- We maintain our overweight position as we think the rally still has some legs, given how steep the yield curve is. SA bonds yields have gone up 160 basis points since 2020 and as inflation comes down, we expect the curve to shift downwards.
Income
- Income returned 3.3% in Q2, outperforming the 2.1% return from the money market.
- The yield pick-up is now in line with its long-term average (50 basis points) compared to the money market. However, given our expectations of interest rate cuts in the next 12 months, we continue to prefer income to money market instruments.
Money market
- We continue to prefer other domestic asset classes relative to cash, hence we remain underweight.
Global asset classes
Equities
- The ‘higher-for-longer’ interest rate environment is typically not good for equities, but the US Fed seems to have managed to land the Goldilocks scenario – taming inflation without causing a recession. By historical standards global equities are expensive as they trade on a 21x PE vs a mean of 17x, but prospects for technology companies remain good, hence the market has continued to rise.
- We remain marginally overweight global equities as we weigh the potential returns against current valuations.
Bonds
- Given our expectations of lower inflation and interest rate cuts in the next twelve months, we are overweight global bonds.
- Our overweight position is also a hedge against an unexpected sell-off in growth assets.
Money market
- Yields on money market instruments are higher relative to bonds but we think this is likely to reverse soon when central banks start cutting interest rates. Hence we prefer bonds and equities.
