Asset managers’ outlook for the remainder of the year

Asset managers’ outlook for the remainder of the year

Gielie de Swardt – Head of Retail Distribution

What can investors expect for the remainder of 2023? With the prospect of a US recession looming, experts from Sanlam Investments are hopeful that structural mitigating factors might ease the severity and duration of a recession – and they see glimpses of opportunity in the markets amid the uncertainty. Recently, experts from across the business looked at 2023 so far, and at what may lie ahead.

Arthur Kamp, Chief Economist at Sanlam Investments said, “Inflation is easing in developed markets, but core inflation is still sticky in the United States.” He said tight labour markets could put upward pressure on wages, possibly putting further upward pressure on US prices.

Kamp believed the US was nearing a period of disinflation and that the US Federal Reserve would probably hike rates by another 25 basis points in 2023. With recession also looming and leading US indicators pointing to negative US economic growth before year-end, there are structural reasons why the recession may be less impactful than feared.

Ralph Thomas, Head of Balanced Funds at Sanlam Investments, said there was a notable shift from goods to services as the main driver of the US inflation number, and that, although wage increases were inflationary, they were not high in real terms. “The baseline expectation is for a US recession; but we do not expect it to be as sharp, strong or of as long a duration as initially feared,” Thomas said.

“The probability of a recession in the US is very high,” agreed Fernando Durrell, Head of Absolute Return at Sanlam Investments. He said it was possible to make certain assumptions about asset class behaviours before, during and after a recession. For example, the US S&P 500 index bottomed during the recession period, with the equities in the index losing value during 12 of the 15 rate cutting cycles since the 1950s.

According to Kamp, emerging markets will lead the global growth tables in 2023 as both China and India promise 5% GDP growth or better. This contrasts with a subdued growth outlook domestically, with close to 0% GDP growth pencilled in for South Africa for the year. “Our long-term trend GDP growth is at the lowest level since WW2,” Kamp said. Fixing Eskom would offer a short-term GDP boost; but the outlook remains constrained by lower commodity prices; the government’s positioning on BRICS and Russia-Ukraine; inefficiencies at local ports; public sector debt; and weak net capital inflows, to name a few.

Local fund managers are monitoring domestic inflation and interest rate data to position their portfolios for the so-called pivot trade, which is when the central bank’s interest rate cutting cycle takes over from the hiking cycle. James Turp, a Fixed Income Portfolio Manager at Sanlam Investments, said that investors, locally and offshore, could expect interest rates to stay higher for longer, with the average time spent at US peak interest rates being nine months (of late) with a similar timeframe domestically. “Our Core and Tactical Income Funds perform optimally when interest rates are peaking,” he said. These funds were recently acquired by Sanlam Investments from Absa.

Durrell, who manages the Sanlam Investment Management Inflation Plus Fund, said that SA bond yields remained “very attractive” going into the second half of 2023. “We will continue to harvest the yield on offer from SA 10-year nominal bonds,” he said, before commenting that offshore bonds also offered enticing valuations. In fact, developed markets have segued from a ‘there is no alternative to equities’ scenario – where up to US$18 trillion was tied up in zero or negative yields – to one offering rich fixed income opportunities.

Going into the second half of 2023, the Sanlam Investment Management Inflation Plus Fund has shifted out of inflation-linked bonds (ILBs) into cash and nominal bonds. The fund’s asset allocation remained very underweight SA listed property due to uncomfortable levels of downside risk, while SA equities were preferred over emerging market and developed market equities. This view on SA fixed income yields was echoed by Thomas, who also favoured nominal bonds and short-duration interest-bearing loans over ILBs.

The alpha building blocks deployed in the balanced funds had disappointed in the first half of the year, but this gave the funds “a cheaper entry point” for the second half, especially given the higher interest rate environment. The balanced fund portfolio manager was optimistic about SA equities, with some caveats: “Risks to valuations of SA equities are a bit higher than we have seen in the past due to load shedding and the impact of diesel bills on corporate earnings,” Thomas said. Load shedding coupled with the political risks attaching to the 2024 elections made keeping a hedge over SA equity exposures prudent.

Vanessa van Vuuren, Portfolio Manager and Equity Analyst, put South Africa’s banking shares under the microscope, explaining an equity reallocation from the SA resources sector to financials. SA banks still offer good value, with the price-to-book for the big four retail banks too low for where we are in the rate cycle. “Banks’ PEs are lower than expected and the dividend yield is not only high but sustainable,” she said.

The Sanlam Investment Management General Equity Fund has diversified its equity exposures by balancing across local industries or sectors. “Our active equity process remains on track, and we expect our bottom-up and valuation-focused approach to ensure that we materially outperform our peers over the longer term,” van Vuuren concluded.

One of the lasting messages from the Sanlam Investments team is that the ‘sea of change’ facing retail investors need not detract from their return outlook. “Yes, we are managing portfolios in a world of change, but it turns out that change is the only constant in global financial markets,” Kamp concluded. “Much of what we have seen in 23H1 has played out before, repeatedly.”

CIS disclosure

Sanlam Investments consists of authorised financial services providers in terms of FAIS and can be viewed on www.sanlaminvestments.com