The response to climate change, inflation, post-pandemic growth and China’s market interventions are among investment managers’ top concerns this year, according to Sanlam Investments.
Sanlam Investments’ portfolio managers believe active managers will focus on the following six themes as they position client portfolios for maximum returns:
Theme 1: Post-pandemic growth
“There is a growing body of evidence that vaccinations will allow economies to open up, governments to reduce lockdown restrictions and economic activity to return to pre-pandemic levels,” said Arthur Kamp, the chief investment economist of Sanlam Investments.
“We are rapidly adapting to new ways of working and learning to live with the pandemic in our offices, and that is one of the reasons we expect the global economy to continue advancing into next year.”
Asset managers are relishing the 2022/23 economic growth forecasts as support for financial markets.
Theme 2: The rise of global inflation
Inflation was singled out as one of the most significant side effects of the pandemic, both globally and locally.
“Supply-side bottlenecks and long delivery lead times are putting upward pressure on prices,” said Kamp, who did not expect the demand and supply mismatch in many countries and industries to ease overnight.
However, central banks in the European Union, United Kingdom and United States view today’s inflation pressures as temporary or transitory in nature.
There is a risk of an inflation blow-out in the US if policymakers get things wrong, but Kamp said the US Federal Reserve has acted prudently to date.
“Inflation of around 2.5% is expected in the long term, which should be consistent with sustainable fiscal policy in the US, but asset managers will have to keep a close watch on what the Fed does over the next year,” he said.
Inflation is also top of mind in South Africa, with CPI likely to top 5% entering 2022. Much of this domestic inflation pressure is attributed to the 2020/21 commodity price boom, including fuel prices.
However, commodity prices are showing signs of cooling, although this will have a negative impact on state revenues.
The SA Reserve Bank expects to continue normalising monetary policy gradually by following up on its recent 25 basis point hike in the repo rate with a further 75 basis points spread across 2022.
Melville du Plessis, the portfolio manager of the SIM Enhanced Yield and the SIM Active Income funds, was not overly concerned about the 2022 interest rate trajectory.
“The market is already pricing in more interest rate hikes than we expect to come to fruition, which allows us to benefit from both the increasing interest rate environment and being able to pick up a bit of extra yield longer out on the curve,” he said.
Theme 3: Regulatory interventions in China
The Chinese government’s regulation of financial markets, coupled with its sabre-rattling over Taiwan and ongoing trade disputes with the US, could impact global equities in 2022.
“China has a vision of ‘prosperity for all’, and this will lead to ongoing interventions in various industries. We expect more regulation and scrutiny as their economy struggles,” said Vanessa van Vuuren, the portfolio manager of the SIM Small Cap and the SIM General Equity funds.
SIM funds with concentrated exposure to China, through Naspers’s holding in Tencent, are allowing for the heightened risks in their valuation models.
Theme 4: Climate response
Allocators of capital have been singled out as essential enablers of the global climate response. The focus into 2022 remains on extracting the maximum possible impact from each rand or dollar invested.
Kamp said the COP26 Climate Change Conference in November 2021 confirmed two things: first, the world is moving towards a greener future; and second, the move is not happening nearly fast enough.
Sustainable investing and a focus on environment, social and governance factors is now the “ticket to play” in the South African fund management space, in both listed markets and private markets.
Theme 5: SA’s poor credit extension
“South Africa has made a remarkable V-shaped post-pandemic economic recovery, but for that projection to continue, we need investment spending to pick up,” said Kamp.
He said that credit extension was weak, in real terms, and made worse by the country battling a “depression level” unemployment rate.
“Asset managers can and do play a critical role in resolving unemployment, particularly in the SME debt space,” said Nersan Naidoo, the chief executive of Sanlam Investments. “These SMEs, in turn, play a key part in creating jobs and economic growth.”
But a range of issues need to be addressed to meet the credit extension theme head-on, not least of which is addressing how the government’s large borrowing requirement is “crowding out” private sector credit extension.
Theme 6: SA’s fiscal constraints
South Africa is facing real challenges in stabilising its debt, and even with prudent fiscal management, National Treasury expects the country’s debt-to-GDP to increase to 78% by 2025/26.
“The problem is that the effective real interest rate we are paying on our debt is significantly higher than the real growth rate of the economy, and while that is the case, you have to run a big primary budget surplus,” said Kamp.
He said the government would have to rein in expenditure, which could prove challenging given the socioeconomic pressures linked to inequality, poverty and unemployment.
The country’s best hope is to grow the economy faster and for allocators of capital to deploy capital with maximum impact for all citizens.
