As capital markets grapple with shifts in the macro-economic and geo-political landscapes, 2022 is a year most investors would rather forget.
Following relative calm over the South African winter, volatility in bond, equity, and currency markets recently returned with a vengeance.
Global equities have declined by 25.3% year-to-date, global fixed-income markets are down 12.1%, and the trade-weighted US Dollar is up by 17.2%.
Persistent inflation in the United States has been of particular concern, motivating the Federal Reserve to accelerate its rate-hiking plan to bring inflation under control.
It has accentuated the trend in US Dollar strength – a common market dynamic when macro uncertainties are elevated.
These challenges were not good news for investment portfolios. However, there are valuable lessons which came from this year.
Bryn Hatty, chief investment officer at Stonehage Fleming South Africa, said these lessons would help investors be better prepared to withstand future market shocks.
Careful capital rotation versus aggressive market timing
Long-term investors who have shown tolerance for short-term volatility by sticking to a disciplined approach should find themselves in an advantageous position.
In particular, a portfolio management approach focusing on careful capital rotation is superior to an aggressive policy of timing the market.
A multi-faceted defensive equity strategy
In Hatty’s view, a well-constructed equity strategy should contain aspects of defensiveness that will provide protection in a rapidly evolving landscape.
It could include allocations to US equities over more cyclical economies like Europe and Japan.
Smaller companies, whose valuations have declined aggressively this year, represent compelling long-term value.
Despite the economic challenges of emerging markets, Hatty believes they should remain a component of an investor’s long-term equity strategy.
Currently, valuations are low, and earnings expectations are modest. For active managers, it presents opportunities for strong performance over time.
Considering the local equity market, the MSCI SA index one-year forward PE ratio (8.0 times) is trading at a 27% discount to the MSCI EM index. It gives an earnings yield of over 11%.
Overweight in cash
A higher weighting in cash carries the benefit of cushioning portfolios from further volatility.
It also provides liquidity to capture attractive opportunities, generating a reasonable income stream with interest rates at more compelling levels.
Investment grade credit bias
Investors seeking a balance between long-term capital growth and stable income streams within the credit markets will have retained a bias to investment grade credit in fixed-income allocations.
Increased allocations to short-duration US Treasury Bonds are looking more attractive, as yields have risen sharply since the start of the year.
2023 and beyond
While 2022 may not end up as envisaged, Stonehage Fleming Investment Management’s view remained consistent.
“A long-term minded investment in a blend of financial assets, with quality, value and diversification as key allocation principles, will continue to offer investors solid prospects,” it said.
“Instead of allowing the stress of market volatility to drive investing decisions, investors would do well to continue with a prudent and objective long-term approach that will hold them in good stead for 2023 and beyond.”