An agile investment strategy tuned in to prevalent market dynamics will help investors find the silver lining in a new year where buoyant equity markets, vaccine roll-outs and easing lockdown measures provide impetus for a level of positivity in investment markets.
In terms of this strategy and with yields negative in global fixed income, equities are likely to produce positive returns in 2021, according to Laurium Capital, which manages Amplify Investment Partners’ Amplify SCI* Balanced Fund.
Speaking at an Amplify Investment Partners webinar, Laurium portfolio managers said they believed South African equities could benefit from strengthening emerging markets and a weakening dollar this year, which has started off remarkably well for equities globally.
The Laurium team favours value stocks, which are sitting at all-time lows on relative value to growth stocks, and expects good earnings growth in S&P 500 companies of around 30%, mainly off poor growth last year. But with the S&P 500 looking fully valued on 22x one year forward earnings, it “expects last year’s winners to underperform the real economy (value) stocks that did not perform last year”.
Another factor in 2022 is that taxes in the US would likely increase by as much as 6% and affect some tech stocks, but less so than value stocks.
Laurium expects the US dollar to weaken against trading partners, and somewhat to the euro, and expects ongoing fiscal stimulus in the US and developed economies. Dollar weakening is good for commodities and the oil price, and there is a correlation between a weakening dollar and strong emerging market performance. South Africa will be a beneficiary of some of those flows.
Laurium co-founder and portfolio manager Murray Winckler said South Africa remains in a tight spot, economically. There is little opportunity for the Reserve Bank on interest rates, given last year’s 300 basis point cut to 3.5%. Inflation is well contained at about 3%, and it could reach 4% to 4.5% in the next 18 months. He expects the rand to end the year at R15.50 to the dollar, and believes that it could trade as strongly as R14.
While locally-focused domestic equities, commonly known as ‘SA Inc’, have been cheap off zero growth, Laurium expects them “to remain in a tough spot.” Winckler said the forecast for SA Inc is difficult, but with the rebound, “we do think we could get 15% to 20% from SA Inc”.He said that international valuations are full and the risks are high. “We wouldn’t be surprised to see an international correction this year. South African equities should get you to double digit returns,” he said.
Among them, resources have been strong for the last four years and will continue to be so, given expectations that China’s economy is expected to increase to 9% this year from 2% last year.
Winckler said that in the last quarter the JSE was 20% up, resources continue to perform well, and he believes South Africa “could have quite a decent year, with equities looking a lot better than cash.”
Brian Thomas, co-portfolio manager and retail analyst at Laurium, said the Amplify SCI* Balanced Fund is a high equity balanced fund and Laurium managers’ belief in the equity risk premium is based on the long term (since 1900) real return in dollars of equities relative to fixed income of 7% versus 2%.
“We believe in a high equity component,” he said. However, SA Inc stocks have yielded “anaemic returns” over the last few years. He pointed to the disconnect between growth and value in the last 10 years. The rebound in economic activity is positive for value stocks, which are often cyclical. “There is always a risk, but we think there is quite a bit of tailwind.”
Click here to watch the webinar