Siboniso Nxumalo 00:08
Hi, my name is Siboniso Nxumalo, I'm a Portfolio Manager at the Old Mutual Investment Group. This is our look back at the second quarter of 2021's investment performance, investment positioning, and in between that, we're going to talk about what's driving the market.
00:26
A summary of performance in Q2 2021
In terms of investment performance, we saw a pleasing outperformance in terms of our wide range of funds, which has been a continuation from the first quarter and the last quarter of 2020. We had positioned funds for a specific outcome that we saw in the world and according to certain investment themes that we were looking to benefit from and position clients to benefit from. And so therefore, we saw that playing out.
00:54
What is driving themes?
Now, if we step back, what's driving those themes? I think there are three key things that we have been doing some work in, and obviously positioning client funds according to that.
01:04
Monetary Policy
The first one that is going on in the world is monetary policy. So, interest rates, especially after Covid, government's lowered interest rates quite aggressively and interest rates look set to stay relatively low for a little while still. Now, low interest rates are good for equity markets, because they are supportive of higher equity markets.
01:25
Fiscal Policy
The second one is fiscal policy. What's fiscal policy? Fiscal policy is the government stimulus, supporting companies, supporting businesses that have gone in, again post-Covid, that's been good for markets too. It's aided in the sharp recovery that we've had. But it's also aided in companies and confidence, etc. And soy, that's been supportive of global markets and global investment returns.
01:48
Vaccinations
The third one is the one that we actually really need to pay more attention to, that is vaccinations. Now, in the developed world, we've seen vaccinations really play a good part, as those economies start reopening. Now, when people get vaccinated, imagine a world where we go back to normal, going out again, start having parties and etc. etc. Those people are gonna start spending, and that spending actually is more likely to head towards discretionary items, which didn't quite happen when we were all sitting at home. And that's gonna have consequences in terms of what companies and stocks are performing, and where the investment returns lie.
02:28
What do we see in the thematic landscape?
So, with that in mind, what do we see in the thematic landscape? So, at MacroSolutions, we look at the world in two dimensions. We look at it in terms of price, so the price you pay for an asset or the value of an asset, but we also look at it in terms of themes.
Now, themes are like the macro industry or company or ESG-related factors. That's the environment that the world operates in. And so, therefore, when we look at the macro themes that are going to be driving equity markets going forward, when we look at it, there are two sides to it. There's a global element and a South African element.
03:03
What we are seeing globally
And in a global element, what are we seeing? We're seeing earnings recovery, continuing, strong earnings recovery. Why? Well, companies, or countries, got locked down last year, and even this year, there's been more lockdowns, etc. And so, therefore, as the world starts reopening, we're expecting material profit recoveries, but it's going to be specific in certain segments and certain sectors in the economy. And if you invested in those companies, and you pay a good price for them, that could actually work out quite well from an investment return perspective. And so, therefore, we're seeing a recovery in earnings.
The second one is we're seeing a regime change. A lot of government support has been put in the market, more so than ever at any particular point in time. And so, therefore, that starts raising the questions, you know, over the medium term, we're seeing a return of inflation. Now, in a global context, we haven't seen inflation for quite a while. And inflation is going to change which shares tend to outperform and which sectors outperform. So, clients have got to be positioned for a possible return of inflation.
04:07
What we are seeing in South Africa
On the South African side, we're seeing a continuation of the cyclical recovery, which benefited clients in terms of our funds, our performances in the second quarter. Why are we going to see a cyclical recovery in South Africa? One, South Africa is a resource-rich nation. What does that mean? We produce a lot of resources and commodities. Commodity prices are high at the moment, which means these South African companies are generating record profits, they're gonna pay record taxes, pay record dividends, that's good for the country. And it's good for our terms of trade.
The other side of it, we've seen some prosecutions in the political landscape, we're seeing a lot more focus on reform in South Africa. So, despite the riots that we've seen, we're seen a cyclical change in South Africa. And then the last one, we always, we like to say, "cash is trash". It's a catchy tune, but what does it mean? It means that actually, the returns you will get being out of the market or be in risk free assets, aren't going to be as compelling as the ones where you are in the market.
05:07
How have we positioned client funds? Where do we think the markets are going next?
So, putting all of those together, how have we positioned client funds? And where do we think the markets are going next? So, we've positioned client funds by acknowledging that in a cyclical recovery, we are seeing value names outperforming growth names. So, the shares that last year really suffered and struggled, it's the banks, it's the retailers, it's the cyclical names; we think that those are likely to outperform with strong, strong earnings and strong earnings recovery, than the growth names, the ones that benefited from the lockdown, which are namely the tech shares. So, we actually own far less of those shares, the winners of Covid. And own far more of the more cyclical names or economically sensitive names.
So, we see value outperforming growth on a global basis, we're seeing SA outperforming the world in terms of investment returns, because again, South Africa is a lot more value orientated, a lot more cyclically orientated. And the shares, obviously underperformed quite materially. And as South Africa also reforms, we're seeing then a strong recovery, and we've positioned clients towards that. Now, in terms of inflation coming back to the fall, financials tend to benefit quite a bit, and so do resources. And so, therefore, we've positioned clients' funds according to that, too.
So, when we step back and look at South Africa, we're saying there's a lot more investment returns to get here. We've positioned client funds in South Africa, and so far, we're saying, going forward, we're going to continue to see what has driven our strong recovery in investment performance. And therefore, we think that there's a lot more to go if you look at these particular themes.
So, thank you very much for listening to us. I will see you again in the third quarter when we review that third quarter and hopefully then again, I'll be bringing you many happy returns like we have done in the second quarter. Thank you.