Outlook for economies, markets and the investment landscape in 2022

CIARAN RYAN: Volatility is back. It returned with a rematch in the last few weeks, with the S&P 500 index falling more than 9% since the beginning of the year and the technology-heavy Nasdaq falling almost 15%. Given this increased volatility, investors need to ensure that their portfolios are well diversified and they need to be aware of the possible rotation from growth to value.

Investors could also be tempted to chase the high and low levels of the market, but due to the increased volatility that is expected, a clear guide card is needed. To help us find out where we are on the investment map, let’s welcome Adriaan Pask, Investment Manager at PSG Wealth.

Hi Adriaan. I think we can all agree that the last two years have been particularly eventful, what with the outbreak of Covid, the market crash and the subsequent recovery. What do you think were some of the major experiences for investors in 2021?

ADRIAN PASK: Hi Ciaran, and thank you so much for having me. Yes, a very eventful period for markets. It has been nerve-wracking for investors during this period. I think if we now reflect on the fact that things have fallen a lot from a recovery perspective, as you mentioned in your introduction, then Nasdaq has been quite volatile, but nothing like we saw in 2020 and sales there.

What the crisis, as well as the subsequent recovery, has taught us is that things are always unstable when it comes to stock investing; there is an inherent cyclicality in the markets and you should be in a position where you can take advantage of it. So it is not necessarily to take advantage in terms of market timing, in reality, but it gets more measured and is more tactical as these opportunities present themselves.

It’s always easy to say, ‘we just buy it when the market collapses and there are opportunities there’, but when you have fears about a sustainable world recovery, things are not always as simple as that.

The other thing, of course, is research. There we find much of our comfort in our processes where, if you have done your job and you know what the company is worth and you are reasonably sure that they will not be compromised in the long run and they will survive, is it just a case of thinking long-term, keeping an eye on the prize; then the possibilities become a little clearer, even though the conditions are quite harsh.

I think the second lesson throughout this process has been to remember that although you may be of the opinion that some asset classes can be expensive – in our case, we have been quite negative about US bonds for a while below the crisis period in which they accelerated, in fact – it just shows that even if you have a pretty good idea of ​​where you want to be, you still need to maintain the diversified portfolio in case anything should happen [such as] a Covid crisis or [something] similar.

CIARAN RYAN: Right. You touched the bond market and there is a lot of talk about inflation. What do you think were some of the key macroeconomic drivers in the last two years?

ADRIAN PASK: I think that’s right. Inflation and interest rates are, in fact, two sides of the same coin. Last year’s talk was very much about where inflation is heading; is it transient, does it become more sticky? We have seen how the Fed has also flipped to 7% with inflation. But I think without a doubt this year, that narrative is going to evolve. We are not talking about whether inflation is coming or whether it is here; it is a risk and it must be addressed.

So we’re talking about rate hikes this year, and the only question is how the market is currently perceiving them and where the error may be.

Currently, funnily enough, both in South Africa and in the US, the market is pricing in three increases. I think in the case of the United States, there is every possibility that it may be more aggressive than that, because we have also seen inflation figures come out more aggressively than expected. So this is something to keep an eye on.

In South Africa, I think we are a little more sheltered in the sense that our bond yields are already quite high. It seems that they have priced a lot, let’s call it, more tax risks for South Africa. But by doing so, they have also created a certain safety margin if we see interest rate hikes. So maybe [things are] less terrible on that front.

Another important macroeconomic result from last year was apparently the rebasing of GDP targets. There were really two important tailwinds for us in South Africa last year; one was the higher commodity prices, which really helped a lot in terms of tax revenue and helped fiscal policy a lot. And so, by rebasing the GDP figures, we actually expected the debt to GDP to go to 80/90/100%. Instead, we moved our debt-to-GDP ratio from around 80% to around 70%, which, oddly enough, is below OECD average debt to GDP because many of these developed economies carry quite a lot of debt based on the stimulus from 2020/2021. So that’s the key.

Perhaps the last one I can mention that I think is important is China’s economic growth strategy. We were getting a little bit nervous last year; all are moving towards a tightening cycle. Commodities have performed quite well, but if China continues to tighten and growth is under pressure, then that is obviously a concern. But they have apparently now surprised us with several interest rate cuts. So it looks like we may have more demand from China for some time to come. Of course, it will also have an important impact on commodity prices, and how well the emerging markets that produce these commodities are also doing on a fiscal front.

CIARAN RYAN: As you enter 2022, what is your view on South Africa’s prospects? Are we in a value trap, or are there opportunities for investors?

ADRIAN PASK: Well, I definitely think there are some areas in the market that would be value traps that look stressed – and they are rightly rated lower from a PE [price-earnings] perspective. But I think that overall there are really good opportunities – real value and not really value traps. But again, you have to be selective through it.

And so the other thing to remember, as I mentioned on the bond front, interest rates are quite high and they are pretty well protected against future interest rate hikes because there is already so much risk in them. If you look at our money market interest rates, they are low, but they are still significantly higher than, for example. would experience offshore.

We believe that the South African markets across equities as well as multi-asset portfolios have a very good chance of outperforming offshore peers. I do not think that is a common expectation, but we trust the valuations and we believe there is a good opportunity in South Africa.

CIARAN RYAN: Okay. This is encouraging news for South Africans. So there still seems to be opportunities for investors here. But are there challenges that you are particularly interested in?

ADRIAN PASK: Yes, I think there are many. I think most South Africans are incredibly well versed in all the challenges that South Africa as a country faces. We often talk about public wage spending, dysfunctional state-owned enterprises, unemployment – especially among young people – corruption, the risk of social unrest. So all these things are challenges South Africa [faces]. In many cases, these have been challenges that we have been trying to deal with for some time. So it is certainly not without risk.

The key is to understand how these things can potentially affect the investment prospects of the securities in a portfolio, if at all. There are quite a few of the listed devices on the JSE that are not directly affected by these things; they have very little South Africa exposure.

On the bond front, I think there were still some concerns last year, yes. But there may even be a likelihood that bonds will default and behind their returns in a way reflect that this risk is not zero.

Going back to our discussion of debt to GDP, things look relatively stable, especially if one begins to compare us with some of the other countries. If you look at US bonds, for example, the debt level is completely taken, and at the same time interest rates are incredibly low. So it seems that the valuations of bonds are completely decoupled from the fundamental reality of the fiscal situation in the United States, while at least in our market it seems to reflect the risks there. And again, these would mean that you have to spend for these processes, which is not the case.

CIARAN RYAN: Okay. So we’ve been talking about bond yields and inflation. Do you think these key market drivers that supported the market in 2021 will continue into 2022?

ADRIAN PASK: Yes I think so. I think it might just be a change in the narrative going forward. [As] I mentioned, interest rates and inflation are really two sides of the same coin. Where last year there was a lot of talk about inflation – will it continue, or will we see it raise its head? But this year, I think we have evolved to understand that this is where it is a significant risk, and interest rate hikes are inevitable. So I think in that sense, yes, the same discussions are on the table.

The other important thing is commodity prices – especially from a South African perspective, because it has been one of the main drivers of fiscal stability as well as earnings on the JSE. If we see China continue to stimulate, it will help extend lending in China as well as commodity prices globally. That could be pretty positive.

And the other important thing is that the feeling is obviously critical if we are talking about stocks in the short term. There are still many, many challenges facing South Africa, and we can expect volatility to creep in when we see turbulence in our political environment, and on the economic front still a lot of uncertainty about political reforms, and whether we are on the right. path.

So if you compare where our situation is in relation to the US, seen from a volatility perspective, I think the volatility in the US will be quite high this year. We have already seen what happened in the first weeks of the year and I think it is a precursor to what we can expect for the coming year.

CIARAN RYAN: One last question, Adriaan. What can investors expect in 2022?

ADRIAN PASK: As I mentioned, volatility. It will be significant, especially in offshore markets. And then in South Africa a very similar situation. As always, we have volatile markets as a emerging market country. We expect a rotation from growth to value. I think investors will become more sensitive to how much growth they price in the investments they make. Investors need to be aware of possible rotation from growth to value. I believe that on the growth front, investors will start to price in less growth than they did historically, especially over the previous two years. At the same time, investors will also begin to become more price sensitive in terms of how much they are willing to pay for stocks and assume future growth.

Therefore, we think the rotation from growth to value is likely for 2022.

CIARAN RYAN: Adriaan Pask, we leave it there. Thank you very much for coming. It was Adriaan Pask, Investment Manager at PSG Wealth.

Brought to you by PSG Wealth.

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