Portfolio Manager, Siboniso Nxumalo, unpacks his views on market activity from the third quarter, sharing key insights for the period, such as the implications of the strength of the US dollar.
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Siboniso Nxumalo 00:00
Hi, my name is Siboniso Nxumalo, a Portfolio Manager at the Old Mutual Investment Group, MacroSolutions. This is the third quarter of 2022's investment review. It was 1971, the US Dollar was weakening rapidly versus the trading partners. And the trading partners, at that specific time, were alarmed by this weakening dollar. And actually, they were unhappy. And so, John Connally, who was a Treasury Secretary to then President Nixon, made a statement that applies today, 51 years later. That statement was, "The dollar is our currency. But it's your problem." And that's the story of this year.
This year has been about the strength of the US currency versus everything else. For example, if we look at the year to date performance up and from January 2022 to 30 September 2022. If I took R100 and invested it in the pound and the euro. If I had invested it in the pound, R100 in January this year has come out to R93. So, versus the pound, we really haven't moved materially at all. Versus the euro, it will be R97. R100 would be R97. Again, haven't moved materially versus the euro. But versus the dollar, R100 invested in January is R113, that's a decent return in this particular market. And why do I illustrate that? It's all been about the dollar and the dollar then has affected investment performance and which assets perform. And with that, let's go into our investment review.
Siboniso Nxumalo 01:35
It was another roller coaster quarter for markets with stark differences in the performance of assets in the first half of the quarter versus the second half. Initially, both bonds and equities rallied as investors expected the US Federal Reserve to ease their pace of increasing rate hikes. However, with inflation persistently surprising on the upside, these hopes were dashed with both equities and bonds gave up their gains and more by the end of the quarter. The Fed put through two more jumbo hikes of 75 basis points each in the quarter and have signaled their firm commitment to continue hiking until the inflation problem is managed, regardless of whether their actions cause the global economy to go into recession or not. Their upper bound target is now 3.25% and is currently forecast to go as high as 4.5 to 4.75%. As one would expect, risk assets did not fare well in the light of these developments. Global equity, as measured by the MSCI All Country World Index, was down 6.8% in dollars for the quarter, bringing the year to date return to -25.6%, firmly in bear market territory. Within this for the quarter, value-type shares and the value index underperformed growth shares and the growth index, as oil and commodity prices fell with the prospect for earnings growth of cyclical industries were revised down. Regionally, the US fared best, down 5% for the quarter, with Europe including the UK, down 10%. Japan was down almost 8% and emerging markets fared the worst. They were down 11.6%, dragged down by China which was down 22%. And all of these returns are in US dollars.
Siboniso Nxumalo 03:21
The South African Reserve Bank also hiked interest rates twice, mirroring the Fed's 75 basis point hikes. Despite this, the Rand weakened by more than 10% relative to the dollar, to over R18, because of global developments as well as our own domestic electricity woes, which are hindering economic activity. SA equities were down 2.4% in Rands for the quarter somewhat shielded by the weaker Rand. Local listed property, which is more sensitive to interest rates, fared worse and was down by more than 4% in Rands. For 2022, these were down 7% and 17% respectively. Even though SA bond yields shifted up in sympathy with global yields, SA bonds still managed to eke out a positive return of 0.6% for the All Bond Index in Rands for the quarter. Locally, cash has been the best asset for the quarter, up 1.3% and year to date, up 3.6%. The JSE Capped Swix Index declined by 4.2% in the quarter, with financials declining 5.6% and resources declining 4.7%, and industrials holding up better in that decline with 2.3% positive returns.
Siboniso Nxumalo 04:35
In the quarter, our largest contributor to our clients' funds was Absa and Glencore and the South African infrastructure companies Wilson Bayly Holmes and Reunert. The detractors were Sasol, which has really had a really strong performance since its bottoms in 2020, followed by the platinum miners Sibanye and Northern Platinum. Now, reading all of that: very strong dollar, weakening global environment. We want to come back to our themes, because we position clients' funds according to our themes. So, we've got three themes that we've been repeating to clients, which then help us position and weather storms like this. First theme is global wave down. Second theme is US to underperform. And the third theme is SA tailwinds fading.
Siboniso Nxumalo 05:19
What does global wave down mean? Which is our first theme. It means that we're seeing a slowdown in global growth. So, we're saying there's going to be an inflation shock, which we've seen, which is followed by a rates shock, which we are seeing now, as interest rates go up. But what is still to come is a growth shock, a rapid decline and slowdown in growth. We see recession risks as elevated, and we think that earnings globally are... earnings expectations going forward are overly optimistic in the midst of this environment. Therefore, we would recommend in a position for underweight in global equity. Starting to recommend in addition to global bonds, but again, that has underperformed quite materially for now. So, we're starting to nibble at that.
Siboniso Nxumalo 06:01
The second theme is US to underperform. The US has been the stellar performer over the last decade. US markets have outperformed everything. So, now we're saying there are risks of a recession in terms of the US. The dollar is near its cyclical peaks. And we don't expect it to stay here for too much longer. We see material risk to US earnings because US margins, company margins in the United States, are very, very high. You've got rising input prices, rising rates, that will bring down those expectations. And so therefore, we're more optimistic on non-US earnings than on US earnings. And we're seeing great opportunities in China and the ASEAN or Asian countries.
Siboniso Nxumalo 06:40
And then finally, our last theme is SA tailwinds fading. So, saying the Covid recovery in South Africa has played out bar one or two sectors, the insurance, or the hospital companies. But largely the recovery from the Covid bottoms is done in terms of South African earnings. We see a less favorable global environment. I've spoken about that. And a less favorable global environment is not good for our commodity-producing nation of South Africa. So therefore, we are saying, well, outside of material structural reforms, we need to focus on better companies that are well managed with good balance sheet with good earnings prospects going forward. We define these companies as long-term winners. So, we're shifting our portfolios to invest in just better companies.
Siboniso Nxumalo 07:24
And with that in mind, when we look at our performance, given what has happened to the dollar - so, we're still invested materially in South Africa. And given what's happened to the dollar, given what's happened to value or low-valued shares, we haven't performed stellar in terms of the last quarter. And so, our clients' funds have struggled. And that is obviously then impacted our later on years. But therefore, which is why we look at our themes and say, well, actually, we still believe in our themes, and we still are navigating the world and we're saying, just... let's be patient, let's hold on, it's going to be volatile, it's going to be quite tense. And so therefore, with that in mind, we believe that we will see a performance recovery in the months or years to come. It's rocky, the dollar has been a key driver. But actually, just like the dollar can strengthen, the dollar can also weaken and change the picture.
Siboniso Nxumalo 08:21
And so, thank you very much. We'll see you in the first quarter of 2023 when I review the year 2022. Thank you.