Bryn Hatty, CIO, Stonehage Fleming
Economic resilience, opportunities in unloved markets and attractively priced local markets
After a rollercoaster year for global markets, the early unwanted gift of Omicron has added another layer of uncertainty to an already muddied investor outlook. While many investors puzzle over how the new variant will impact portfolios and affect their bottom line, it’s important they avoid a knee-jerk reaction.
While being mindful of potential pitfalls is sensible in any economic climate, investors with a long-term horizon need to look beyond the market noise created by Omicron, and rather draw on core observations from the year gone by to identify new investment opportunities.
Global Economic Resilience
While the pace of global economic growth has slowed from high post-crisis levels, it has held key consumer-led tailwinds, made possible by successful global vaccination campaigns. Even with the rise of the new Omicron variant, Covid-19 is increasingly contained by vaccination, which should limit the impact of future infection waves.
Locally, I expect economic growth to moderate after the strong bounce back posts the Great Lockdown. While the country’s fiscal and current account balance is likely to benefit from a persisting commodity windfall, I believe the local economy will continue to muddle through. We expect the slow pace of structural reform to continue, and that the new Finance Ministry will balance this with social support for the most vulnerable. What’s more, the commodity windfall is likely to persist, although at a lower level, benefitting both the fiscal and current account balances.
On the inflation front, rising inflation risks are impacting many investors’ risk appetites. While the pandemic has undoubtedly induced the current bout of inflation, we are keeping a close eye on how this develops over the next year. Supply chain disruption and rising wage pressures on both sides of the Atlantic are likely to underpin price inflation and although we are not expecting a return to 1970’s style stagflation, we are keeping a close watch on developments.
Attractive Opportunities in Unloved Markets
Although the US remains a core holding in Stonehage Fleming equity allocations, the firm is finding opportunities in other unloved developed markets like Europe, and in particular the UK. Non-US markets combine lower valuations and emerging tailwinds as the global economy remains robust while emerging markets have faced multiple headwinds, most recently in China, at roughly 13 times forward earnings these markets offer potentially attractive long-term returns.
Sentiment towards more cyclically sensitive “value” sectors has reversed following their strong performance from “Vaccine Monday” through to the first quarter of this year. It is important to maintain some exposure to these parts of the market as they will benefit from the reopening of the global economy. Outside of equity markets, we are finding opportunities in some emerging market bonds as well as more alternative areas like catastrophe bonds.
Local Markets Still Attractively Priced
The so-called SA Inc’ stocks – those that generate the majority of revenue from South Africa, have performed strongly this year, and there are good quality local businesses that are still attractively priced, resulting in the current de-listing ‘boom’. While commodity stocks also appear optically cheap**,** this will depend on the future path of commodity prices. The local bond market is also attractively priced.
For investors who can tolerate a little more risk, the historically steep yield curve still provides attractive opportunities.