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Traders in SA and internationally had been spoiled with better-than-expected returns in 2021, however we had higher brace ourselves for some bumps in 2022, says Alwyn van der Merwe, director of investments at Sanlam Personal Wealth.
US equities are up 14% for the yr thus far, the French CAC 40 index is up over 21% in US greenback phrases over the identical interval, and the JSE Prime 40 index is up 15.5%, even after final week’s sell-off on information of a brand new Covid-19 variant that’s anticipated to place a crimp within the international restoration.
Main the cost for US equities are tech shares reminiscent of Apple, Alphabet (Google’s holding firm), Microsoft and Tesla, with year-to-date features of between 48% and 65%.
Not like in 2020 when commodity shares and Naspers/Prosus accounted for a lot of the upward momentum on the JSE, this yr it was industrial shares, with notable re-ratings for Richemont (up 82% thus far this yr), Investec (up 116%) and MTN (160%).
The re-rating of native shares
MTN loved a considerable re-rating after beforehand being dogged by its authorized troubles in Nigeria. Investec break up off its funding arm Ninety One, which gave buyers a extra centered publicity to its banking property. “Investec’s share worth was all the time relatively low-cost, and traded at price-to-book worth which was nicely beneath its European and UK friends,” says Van der Merwe. “It was clear that rates of interest would go up in Europe and the UK, which might drive up Investec’s profitability. That led to a re-rating, which coincided with a turnaround within the working efficiency in beforehand lagging divisions throughout the financial institution.”
Richemont was by no means significantly low-cost, however was a significant beneficiary of adjusting spending patterns because of Covid. “One of many modifications we witnessed because of Covid was that individuals spent much less on journey and extra on luxurious objects reminiscent of jewelry, and this labored to the good thing about Richemont and others working on this section of the market. It was inevitable that Richemont would expertise a re-rating. The query is, is that this sustainable? That continues to be to be seen. One would count on spending to return to some sort of regular sample sooner or later, however for the second that is nice information for Richemont,” says Van der Merwe.
Rising inflation
At first of 2021, US authorities bonds had been yielding 0.91%, however because the yr progressed, yields shifted larger to round 1.7% because the spectre of inflation reared its head, leading to capital depreciation for bonds. Oil costs have shot up 60% in US greenback phrases for the yr thus far, whereas gold is barely down.
“Dangerous property reminiscent of equities and commodities did nicely in 2021,” says Van der Merwe. “The identical can’t be stated for much less dangerous property reminiscent of gold and authorities bonds. At Sanlam Personal Wealth we anticipated native equities to return about 12% for the yr, which was barely beneath the 15.5% achieved thus far for the yr. We anticipated single-digit returns for international equities, and once more we had been a bit conservative. The worldwide financial restoration was stronger than we anticipated, and this accounts for the better-than-expected returns from international equities, significantly within the IT sector.”
Regardless of a better-than-expected restoration within the first half of 2021, cracks began to look within the second half, and these will turn out to be extra pronounced going into 2022.
Following materials worth will increase in commodities and supply-side bottlenecks, inflation emerged as the only greatest financial concern each globally and in SA.
SA’s producer inflation for October 2021 got here in at simply over 8%, whereas private consumption expenditure inflation within the US, which excludes vitality and meals, is at present nudging 4.2%. That’s more likely to drive financial coverage going ahead. The one coverage software the US Federal Reserve has to counter the inflationary risk is rates of interest, and the prospect of upper rates of interest in 2022 might strangle the post-Covid progress momentum. There may be now discuss of stagflation – no or little progress accompanied by rising inflation.
How did Sanlam Personal Wealth place its portfolios in 2021?
“We’ve got many alternative mandates, with discretion throughout asset lessons and geographies,” says Van der Merwe. “We stock a full weight in SA equities, with 45% to 50% publicity to home equities, and a relatively full publicity to international equities at 15% to twenty% with the rest of the 30% offshore publicity largely invested in various property. Offshore publicity is restricted to a most of 30% as per retirement fund laws.
“Our publicity to equities total is about 70%, in opposition to the utmost allowable restrict of 75% below SA retirement laws. Because the yr progressed, we trimmed international equities and I believe this was a great name. We parked a number of the proceeds of those gross sales into US greenback money, and a few of it went into property uncorrelated with equities.”
What are the important thing financial and monetary variables more likely to drive monetary markets in 2022?
“The most important danger for monetary property is that valuations are excessive as we enter 2022, which implies the market is delicate to headwinds or disruptions, reminiscent of larger inflation, or one other Covid wave or maybe a significant chapter,” says Van der Merwe. “Reactions to dangerous information like this may very well be magnified because of this. Valuations are excessive within the US, much less so in SA, and there are important dangers of excessive inflation and aggressive coverage response from regulators.”
One issue that has modified in the middle of 2021 is that buyers are much less susceptible to overreact on dangerous information concerning the virus. “You possibly can see this within the East the place individuals are nonetheless very cell despite the fact that an infection charges are going up. From an funding viewpoint, asset costs are costly, so buyers have to regulate their expectations decrease. We’ve got been spoiled with returns of 14% or 15%, and that is merely unsustainable.”
The underside line: thanks for the nice returns in 2021, however put together for some potential bumps in 2022.
Delivered to you by Sanlam Personal Wealth.
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