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In these crazy times of significant uncertainty, it is interesting to see what the large investment managers’ investment thinking is. Although we do not necessarily share their views, we think it’s important to provide insight into the views of Allan Gray, Coronation and Ninety-One (formerly Investec).
Allan Gray – 40% of the Balanced Fund is in Local (SA) equities
The headlines about COVID-19 will eventually subside, given the low mortality rates. The focus will then shift to the economic cost, and the subsequent public sector and central bank response across the world.
Market values are distorted, and it is frustrating for value investors, such as Allan Gray. However, portfolio risk is managed, and a diversified portfolio is constructed of undervalued assets.
Most local asset managers have unusually similar positions, owning the same large dual-listed shares and SA government bonds. However, the contrarian in Allan Gray has 40% of its Balanced Fund in local equities, which are depressed and have significant upside.
In the short-term, markets have run ahead of fundamental values, but local (SA) shares are cheap in normal circumstances.
On a five-year view, the Balanced Fund should achieve strong real returns similar to its long-term history.
Coronation – Cash rates no longer offer real returns
As the world comes to grip with a potential second wave of pandemic risk, coupled with the acceptance that a vaccine is the only feasible solution, market sentiment continues to swing between optimism (driven by central bank monetary stimulus) and pessimism (driven by severe global recession).
The developed world is demonstrating that it can support their local economies, which contrasts with emerging markets outside Asia. Against this backdrop, Coronation are negative on global bonds and have increased their global equities during the March sell-off, to now being overweight equities.
The SA lockdown will have a massive negative effect on corporates and households on the back of an already fragile economic environment. Coronation are concerned about SA’s fiscal disciplines, which they are closely monitoring. However, despite that, they hold SA government bonds due to their attractive yield over cash.
Despite local (SA) shares appearing very cheap, they prefer global JSE equities.
Listed property is in a “perfect storm” and the sector appears very cheap, but deep research is necessary to identify the right opportunities.
The key consideration is that cash rates no longer offer real returns, which is likely to deteriorate by an eventual increase in inflation due to the massive injection of monetary stimulus from central banks. Therefore, multi-asset funds (Balanced funds) are in a better position to produce real returns.
Ninety One (formerly Investec) – SA bonds offer better risk-adjusted returns than SA equities
Their preferred asset class remains global equities.
The outlook for the SA economy has worsened further and SA should not lay blame on COVID-19, as the economy was already in recession.
Despite SA slashing interest rates to 3.75%, SA real rates remain relatively high and it is likely interest rates will be cut further.
Locally, the best opportunities are in SA government bonds, which have higher risk-adjusted return potential than SA shares.
Although they have been increasing their allocation to local (SA) equities, the market may not be pricing in the risks that SA companies face in the coming months.
Forecasting complex macro outcomes is impossible. Therefore, they maintain a balance of exposures that offer protection against a range of potential outcomes.
Investonline’s views – Have a conservative investment strategy in the short term
Although we respect the views of these three large investment managers, we do not necessarily agree with them. In summary we believe:
- Global equities and bonds are risky
- Selective SA equites are extremely cheap
- SA government bonds offer value, but with long-term risk concerns
- Cash returns are unlikely to beat inflation in the short to medium term
We will expand on our views in our 3rd Quarter Market outlook report in two weeks’ time.
In these unprecedented times of uncertainty, it is key that one ensures your savings are invested in an investment strategy that suits your personal risk profile. It is best to build a personal financial plan with which we can assist.
There are so many important aspects to managing your finances: having the right tax structure, estate plan, risk profile, investment strategy, enough liquidity, best administrator, personalised service, and ongoing expert advice. This should all be combined into a personalised financial plan that we will do for you at Investonline. Click here to see an example of our financial planning process.