In an environment where market risk is high, a sound investment strategy is as much about controlling for risk and avoiding the investment “bombs” as it is about asset allocation and finding value.
Economic recovery across the globe and the rallying in risk assets provide some cause for optimism going forward.
There have been significant tailwinds and levers supporting risk assets, including fiscal stimulus, says Iain Power, manager of the Amplify SCI* Wealth Protector Fund and chief investment officer of Truffle Asset Management. While the expected economic loss from the pandemic is about a quarter of the global financial crisis, there has been four times the fiscal response from central banks, which has supported companies and individual expenditure, lifting asset prices.
Current forward multiples of the S&P 500, European and even some emerging markets remain high. However, South Africa remains about 20% undervalued and looks like one of the cheapest markets in the world, relative to its 10-year median.
The wide gap that has opened between South Africa and other emerging markets, and improved prospects for the economy, will likely result in a reasonable performance from local shares and bonds. However, value is relatively hard to find.
The Amplify SCI* Wealth Protector Fund is being positioned for inflation surprising on the upside and bond yields rising, and its search for value is seeing it steer away from the highly-priced tech stocks in favour of more cyclical companies.
The fund manager has been finding value in these cyclical and economically sensitive stocks and identified companies set to benefit from a growing economy in sectors such as cement, financials and oil.
At the same time, in an environment where market risk is high, the fund is focused on controlling risk through “a combination of having right stuff and not having the bad stuff”, Power says.
The ongoing focus is on capturing and locking upside returns while preserving capital. “It’s not only about picking the winners but also avoiding the bombs,” Power says, referring to several high profile, poorly performing companies that the fund deftly avoided.
Globally, he anticipates that earnings bases, which are low, will recover and that the vaccination processes will continue to accelerate. These and strong fiscal support should result in “a powerful synchronised global recovery from the second half of 2021”. He expects a big push in starting to normalise their spending behaviours and starting to travel.
From a risk point of view, central bank’s rhetoric points to a reluctance to tighten monetary policy, indicating they would prefer to see inflation “running a bit hotter”. “The biggest risk we can see looking out 12 to 36 months is that inflation might start to come through strongly, and then central banks may be forced to reflect and change that approach abruptly.”
With potentially delayed vaccine rollouts in South Africa, the economic normalisation the rest of the world is likely to experience will only be felt here in 2022, perhaps even at the back end of 2022.
Power says that while South Africa historically tracked the median countries in terms of GDP growth (with higher volatility), it has detached itself from its global peers, in terms of economic per capita output, due to state capture, corruption and a lack of fixed investment. This means that “the future in terms of growth potential is not going to be what it was in the past. We are unlikely to see returns from SA Inc companies we did from the 1990s to just prior to the global financial crisis”, he says.
“The future for us looks different to the past, and the yardsticks we used for value are no longer appropriate.”
However, that does not mean there is no value to be found, as the fund’s strong performance continues to demonstrate.
The Amplify SCI* Wealth Protector Fund has consistently beaten its benchmark and recently won the 2021 Raging Bull Award certificate for the best straight performance in the multi-asset low equity category over the past three years, which Power says have been “extraordinarily challenging times to manage money”.