For financial advisers, some of the most valuable investment conversations are also the most difficult. Markets are being shaped by geopolitical uncertainty, changing interest-rate expectations, pressure on consumers, stretched valuations in some areas and attractive opportunities in others.
At the same time, advisers are having to help clients make sense of everything from gold and oil to hedge funds, offshore exposure and crypto – while keeping them focused on their longer-term investment journey. Amplify Investment Partners’ Head of Distribution, Nico Janse van Rensburg asked three fund managers their views.
Amplify Investment Partners recently asked its intermediaries to “Shape the Conversation” in the latest Power Hour webinar, inviting them to submit the questions and investment themes occupying their clients’ minds. The response was significant: 70 questions consolidated into 10 key themes:
1. Where can investors find opportunity over the next three to 12 months?
Omri Thomas of Abax Investments, co-portfolio manager of the Amplify SCI Flexible Equity Fund, expects earnings to grow in a macro environment that’s turned from expectations of interest rate cuts 12 months ago to interest rate increases. Despite that, there is some value in local sectors trading at single-digit PEs, so the fund is quite constructive on risk assets and on markets. “Local Inc” stocks look very attractively valued. Bond yields have rallied more recently and sold off a bit, but other interest rate-sensitive equity sectors have not rallied to the same extent, so there is some value there. Global valuations have been supported by strong earnings growth. “We still see a bit of value in Europe and more so in Asia, specifically Chinese equities, and selected emerging markets.”
Brian Thomas from Laurium Capital, co-portfolio manager of the Amplify SCI Balanced Fund said stocks that “dance to the tune of what’s going on in South Africa” are trading at around 10 times multiples, which is cheap relative to their average, providing some opportunities. “Globally, there has been some phenomenal earnings growth, with probably the best reporting season in the US in my memory. About 290 of the S&P 500 have recently produced 55% earnings growth in the last quarter year on year. These factors indicate that over the next year, investors could get double-digit returns out of both the South African and offshore markets in rand terms.”
2. How much should geopolitics influence investment decisions?
Dain Winsnes from Matrix Fund Managers, co-portfolio manager of the Amplify SCI Income Plus Retail Hedge fund, said that while some major global events have had little effect on markets, the war in the Middle East has left a lasting imprint due to its effect on energy prices and inflation. “The question is how inflationary effects roll out and whether that feeds into second-round effects and wage expectation,” he says.
3. What is the outlook for oil prices for the rest of the year, and why haven’t markets responded to the drop in oil prices and how much has passed through to inflation?
While the market focuses largely on the oil price, the Balanced Fund’s managers also look closely at the refining spread, and the cost to refine and convert oil has increased significantly, feeding into the fuel price at the pump, Brian Thomas said. “That impact combined with the impact of the oil price is in our view certainly going to feed through to some inflation going forward,” he added. Various countries are drawing down on their strategic oil reserves, which could also underpin the oil price.
Omri Thomas says, meanwhile, that while Russia’s invasion of Ukraine immediately fed through to inflation, with the Iran war, “the market appears to be saying it is going to resolve a lot quicker, and the inflation impacts are not going to be as big. But they may be focusing on the wrong indicator, as the spreads really determine the petrol price at the pump, which impacts the whole economy. The impact on consumer spending in South Africa is evident.”
This impact is evident in several retail results such as Boxer and Woolworths,. “I think this is the first time in a long time that we’ve seen actual food volume going through the tills going backwards,” said Brian Thomas.
Winsnes adds that the oil price has been affected by Iran bombing a Qatari liquefied natural gas plant and Ukraine being successful in targeting Russian refineries. “This tells us that these refined spreads that are so elevated are going to stay there for some time.”
4. Is there still a place for gold?
Gold is a notoriously difficult thing to call, says Brian Thomas. “The gold price is stuck around the key $4,000 level, and if it can hold above $4,000 (and central banks are still in the market to buy at that level), it looks like gold is currently fairly well supported.”
Winsnes expected this level hold and probably go up from here, while Omri Thomas said there have been several supporting factors driving the gold price up. “Due to the impact of the Trump administration, reserve banks are wary of having frozen assets stuck in the US in dollars, so there’s been a move away from using dollars as a reserve, to using gold. That has driven strong demand and strong prices. Now with interest rates going up, the carry cost of holding gold is also going up, so that’s become a bit of a headwind and one of the main reasons behind a recent pullback. Gold is one of the oldest assets in the world, and over time it has shown its value, so in a diversified portfolio it makes sense to add gold, whether it is the commodity or gold companies.”
5. What do changing interest rates mean for fixed income?
Winsnes says that with new US Fed chair Kevin Warsh’s introduction of five new task forces – one of them being data and the methodology and how they collect inflation and measure inflation – “the expectation is that come the end of the year, inflation is going to be measured differently and might be a lot lower than what the traditional method says it is.”
“This may result in SA inflation differentials compressing a little, which is good for SA assets, and it also means that we don’t necessarily need to hike as much as we would have had the Fed been hiking as it potentially should have.”
He adds that bonds have performed well largely because of two things – the GNU, which removed a lot of political risk out of the return premium, and a new inflation target. “We are one of two countries that are on a positive outlook from the rating agencies, we are on a positive rating cycle and could be investment grade again in a year or two,” he said.
“If we go back to investment grade, that’s another 150 points in the yield and a massive indiscriminate buyer that comes into the market. We have been upgraded twice during the Iran conflict, our fiscal side remains highly credible, the SARB and its governor are among the best globally as seen by foreign investors. So, we are doing the right things,” Winsnes said. “Unfortunately, growth isn’t coming through, and companies are sitting on a lot of cash (e.g. R2 trillion sitting on corporate balance sheets that needs to be deployed).”
Brian Thomas adds that the bond market “rallied really hard in the face of some risks in the economy, while the South African equity market has languished. The domestic market is very consumer-driven, and when the consumer is under pressure, the bond market is pricing a lot more positivity than the equity market. This may imply there is potential for a rerating for equity.”
6. The consumer squeeze: what role is online gambling playing?
Online gambling is a massive drain on consumer spending and a big strain on a part of our population that really can’t afford it, says Omri Thomas. “This, and the growth of online retailers, have put tremendous pressure on local retailers, and those pressures aren’t subsiding anytime soon. The consumer is feeling the pain in addition to the petrol price, where up to 40% of a low-end wage earner’s salary gets spent on transport.”
7. Local or offshore – where are managers finding value?
The Amplify SCI Balanced Fund, which is quite aggressive in its asset allocation, is currently fairly neutral for a change, according to Brian Thomas. “The Laurium team see opportunity in domestic South Africa shares, while bonds are around fair value. The MSCI World is trading in line with of slightly cheap relative to its 10-year average, so global equities are at fair value at the moment.”
Meanwhile, the Amplify SCI Flexible Equity Fund has cut its bond weighting and reduced duration, says Omri Thomas. “One interesting area to highlight is Chinese equities and Chinese tech specifically, where tech companies are back to valuations they were at a decade ago. The clearest example is Tencent, which is trading at a very attractive valuation level and with the see-through discount that you get in Naspers and Prosus, a very attractive asset to own.”
Winsnes adds that one of the benefits of inflationary episodes is inflation-linked bonds which provide a bit of a cushion should you get your duration call wrong. “The team at Matrix which is also responsible for the management of both the Amplify SCI Defensive Balanced and Amplify SCI Absolute Fund, have slightly reduced long bond exposure in favour of inflation-linked bonds.”
8. In an environment of market concentration in mega-cap stocks, how should investors balance active management against passive investing?
Investors understand that the debate is not about whether active or passive is better. Omri Thomas shared that “as passive funds grow, they keep buying the same index stocks and the market becomes very concentrated, leading to unbalanced portfolios.”
This requires investors to have an almost active approach to blend different passive funds to avoid concentration risk, he says. “Momentum and concentration create more divergent returns from sectors, which, as an active stock picker, also gives you more opportunities.”
9. Where do hedge funds fit into client portfolios?
What is the ideal hedge fund exposure, how should hedge fund wraps be used in ILLAs, and why have they performed similarly to non-hedge funds during conflicts?
Janse van Rensburg discussed how Amplify has been on an educational drive to help clients understand the differences between various hedge fund strategies – such as fixed-income, market-neutral and aggressive long-short. Amplify is strongly of the opinion that blending these various hedge fund strategies with long-only funds provides great diversification benefits to clients,
“The decision on how much of a portfolio is dedicated to hedge funds depends on clients’ wants, needs and goals, but Amplify believes hedge funds need to be part of their portfolio, especially if they want risk diversification to mitigate sequence risk, or return enhancement for more aggressive investors,” says Janse Van Rensburg.
Winsnes gave an example of a recent trade to illustrate the fixed-income strategy in action – the SARB July meeting, where the market started to price the probability of a hike, which the team at Matrix thought was potentially unlikely. “We put on a trade to make 30 basis points if SARB did nothing, making alpha for the fund by differing materially from the curve and expressing their views in a disciplined manner,” he says.
10. Crypto versus gold: does digital currency belong in a portfolio?
Brian Thomas mentioned that you actually can’t own crypto within a CIS, and it’s probably been a good thing, as Bitcoin is down 50% from its peak. “There potentially is a use for crypto and portfolios down the line, but at the moment it is not in Laurium’s portfolios,” he said.
Winsnes mentioned that US-backed stablecoin being issued by the Treasury in the coming years might be an alternative asset for owning US bonds down the line.
Beyond returns: why the investment journey matters
The role of the advisor is unmatched, Janse van Rensburg said. “The most important part of a client’s investment journey is having an advisor to guide them through the journey. Aligning your plan with the right product and fund is very important, but behavioural coaching is critical to add value to clients.”
He says that, taken together, the questions submitted through Amplify’s “Shape the Conversation” initiative show just how broad the intermediary conversation has become. “Advisers are not simply being asked where markets are heading. They are helping clients navigate geopolitical shocks,
inflation and interest rates, pressure on household finances, asset allocation decisions, new investment vehicles and the behavioural challenges that accompany periods of uncertainty.”
And while markets may continue to generate difficult questions, the discussion also points to opportunities across local and offshore equities, fixed income, alternatives and diversifying assets.
For intermediaries, that makes the ability to translate market developments into constructive client conversations increasingly important – reinforcing Janse van Rensburg’s point that the adviser’s role extends well beyond selecting a fund or chasing a headline return.
