Peter Brooke 00:00
Good day. I'm Peter Brooke, a Portfolio Manager at the Old Mutual Investment Group. And this is the first Macro Perspective of 2022. Therefore, I can wish everyone a Happy New Year and a great 2022. In fact, I know 2022 is going to be a better year, because the market told me.
00:16
Very strong returns last year, saying that Covid restrictions should ease up, which is certainly the case in South Africa as we have successfully weathered the Omicron variant in a very pragmatic manner. The market is also saying that we will enjoy another strong year of global growth, positive profits, and an easing of supply chains, pushing down goods inflation.
00:37
Unfortunately, while everyone is enjoying a better 2022, fund managers will be having a tougher year. The V-shaped recovery is resulting in higher interest rates and a reduction in liquidity, which will probably mean lower valuation multiples, offsetting the better earnings and reducing expected returns. While fund managers enjoyed an excellent 2021, the good news of higher returns means lower returns into the future. You can't have your cake and eat it.
01:07
On our five-year expected real returns, we have a 4% real return expectation for global equity. But I suspect the risk is the downside. What is certainly true is that we can expect more volatility in 2022 as markets try and navigate a more hawkish Federal Reserve. The consensus expectations have swung sharply to four rate hikes this year, increasing interest rates by 1% in the US. This internal-put pressure on our reserve bank, and Johan Els expects they will hike three times for 75 basis points of increases.
Quite frankly, neither of these numbers look too concerning in terms of slowing the economy down. But it's more about the cost of capital. In the developed world where they've been actively printing money through quantitative easing, this has pegged global bond yields at very low real yields. As quantitative easing is removed, and rates rise, this will allow global bond yields to increase, which is happening at the moment. This in turn is resulting in a sharp rotation from expensive growth shares to cheap value shares, within sectors away from tech towards financials and energy.
02:19
Our funds are well positioned for this, and the increase in value is currently compensating for the decrease in growth. So, for instance, in the last month, world value is up 4.9%, while world growth is down 2%, giving a total market return of one and a half percent. However, as we pass through time, I think the risk for overall market levels increases as rates go higher and more liquidity is taken out. Our analysis still shows South Africa as relatively cheap. And we are much less vulnerable to rising short rates, as our bond yields are already high, reflected in our low price earnings ratios on the JSE. In fact, South African bonds are some of the best performing bonds in the world. But we are no longer as cheap relative to our emerging market friends. And this is true of our currency as well.
So, while still expecting better returns from South Africa, we are also seeing opportunities to diversify elsewhere in the world. All of this sums up to a more tricky 2022 for fund managers and our successful policy of being very overweight growth and South Africa needs to become more nuanced. Good luck for 2022 and we'll discuss more of our thinking next week.