Safe-haven assets running out of steam?

By: Adriaan Pask – CIO of PSG Wealth

2022 was a reality check for many investors and wealth managers. Investment themes that remained intact for decades quickly unravelled, forcing them to reconsider their previously considered safe-haven assets like US bonds and growth shares.

A perfect storm for investors – yet SA managers fared better

The year started off well enough, until the outbreak of the war in Ukraine, which took many by surprise. The fear of the conflict escalating into a NATO war captured the minds of many investors, leading to a sell-off in global markets. High global inflation numbers and unprecedented interest rate hikes (in size and speed) added to the pressure, creating a perfect storm for investors who had never experienced this level of inflation since the late 1970s.

However, South African fund managers are more familiar with these types of conditions. After all, we have seen 7% inflation as recently as 2016. This enabled us to weather the storm better than our global counterparts.

The interest rate environment also led to a sell-off in growth assets

This was most apparent in the tech sector. While some of these tech companies are great businesses, they aren’t always good investments, and sometimes they become overpriced. The job cuts being announced by these companies are a clear sign that there is significant pressure on growth and that businesses are trying to cut costs.

Ultimately, the sell-off was widespread, affecting various asset classes, including speculative assets like cryptocurrency. (These assets are better suited for speculators than investors.)

Investment themes that had been entrenched also lost steam in 2022

For example, the transition to cleaner energy saw a large amount of capex being halted during the year. This resulted in a greater reliance on fossil fuels, which was exacerbated by sanctions on Russia, causing the oil price to rally and many oil counters to perform well. Exxon’s share price, for instance, rose by 70% in 2022. On the other hand, one of the proxies for clean energy, Tesla, saw a 70% drop in the same year.

Investors began to understand that the shift to cleaner energy was more of a transition than a sudden change. A more pragmatic investment approach will be required moving forward.

Belief that US government bonds are risk-free were challenged

Many offshore investors were not prepared for the sell-off in these assets, especially given their bull market for 40 years. And this is reflected in some fund manager results globally. Most investors expected diversification support from holding US government bonds, but that was not the case.

Looking ahead, 2023 is likely to be a year of uncertainty, with conflicting factors pulling in different directions.

On the one hand, there is evidence of structural underinvestment and diminishing inventories in the commodities market, which could drive prices higher in the long term. On the other hand, there is a risk of a recession in the US, which could dampen demand for commodities in the short term. This could also be said for equities and the US dollar, with high valuations and an expensive fiscal backdrop, respectively.

Balancing these conflicting forces will be a challenge, and some fund managers and investors may choose to time the market (a strategy that we do not recommend), while others may focus on their longer-term positioning. Regardless of the approach, the market is likely to be volatile, with heightened uncertainty and differing interpretations of economic indicators.

Ultimately, the key to success in navigating these uncertain times is a focus on valuations. While sentiment may change and macroeconomic calls can be difficult to predict, valuations have a much stronger track record of carrying investors to success. So, as we move forward, we will remain focused on the fundamentals, while being aware of the risks and opportunities that lie ahead. It is also important to remember that, while there is a likelihood that Fed rate hikes could peak this year, there is a delay between interest-rate hikes and their impact on the economy. Global inflation may not come down until later this year, making it difficult for policymakers to make informed decisions, adding to uncertainty.

While 2022 was a challenging year for investors, it also provided opportunities for those who were prepared and willing to take a long-term perspective. The key to success in the current environment is to have a well-diversified portfolio and to be aware of the risks involved with different investments.

It’s also important to work with a trusted financial advisor who can help you navigate these challenges and provide guidance on how to make informed investment decisions.