Peter Brooke
Good day. I'm Peter Brooke, a Portfolio Manager at the Old Mutual Investment Group. This is Macro Perspective 27 or 2021, and I'm going to summarise some of our longer term thinking on investment themes and risks.
Our bi-annual themes process just finished, with inputs from a wide range of sources. This has included external experts, internal partners like Futuregrowth and Johann Els, and a number of different work streams. The top down work streams looked at inflation, which is the current topic of the day, the global cycle and sector rotation. We also did a number of bottom up sessions, looking at company balance sheets, e-commerce, digitization, regulations, property post-COVID, and ESG. Many of these smaller themes will filter through into individual companies.
John Orford has the unenviable task of putting all this together and weeding through whether we should focus on big government protectionism, China transition, US overheat, or a low return world. The conclusion of the process was that many of our big drivers of last year are unchanged. Cash is still trash, with very low real rate, pushing liquidity into other assets. The world is still recovering, or what we call global wave, which favors cyclicals over defensives.
And South Africa is benefiting from all of this through a terms of trade windfall, which will drive a cyclical recovery. However, as time moves on, these schemes are getting older and the risks are growing. Firstly, inflation is going to increase in the median term. This means it is more about rotation, and we can no longer expect multiples to expand. This means lower returns and creates a new risk, which is Fed policy, when will they end the party. Secondly, the global wave is weaker, the V-shaped recovery from Covid has largely happened and indicators will struggle from here. There will still be lagged benefits as vaccines improve mobility, and the strong fiscal and monetary stimulus work their way through but is no longer a rising tide.
We also have... in addition, we have a growing risk from China tightening. Of interest to me, within all of this, South Africa looks a little bit better. We have some unique positive themes, which have improved, and that is the terrible headwinds from electricity blackouts will get better. We have also been a real laggard on vaccines, so have the potential for improvement from here.
But most importantly, our risk has a positive skew. Do we actually deliver on structural reform? Remember that risks can be positive or negative and would certainly surprise the world if SA succeeded. And that is not in our asset prices. In summary, a very invigorating, thoughtful month that leaves us better positioned to allocate our clients' capital into the future.
I hope you enjoyed this perspective. Until next week.