Chasing alpha in a complex landscape
The bear market characterised by decades-high inflation and subdued economic growth made returns hard to come by last year, with the contributing factors set to persist into 2023.
“Given the elevated levels of risk and uncertainty present in markets during the prevailing period of policy normalisation, investors should proceed with prudence,” says Renzi Thirumalai, Investments Head at FNB Wealth and Investments.
With higher-for-longer interest rates and a sluggish recovery predicted, asset managers must navigate a complex investment landscape in their hunt for alpha. However, prudent investment strategies can deliver income and returns for investors.
“From an asset allocation perspective, the return of yield in the sovereign bond market is a welcome event and offers investors an alternative to funds that were forced up the risk curve in the past decade and a half to find returns,” says Neville Chester, Senior Portfolio Manager at Coronation Fund Managers.
While bonds offer reasonable yields, they are still quite volatile, cautions Thirumalai. “We have seen some of the highest volatility in the bond market for some time, and current rates indicate a much weaker economic outlook.”
Locally, the high real returns on government bonds make them hard to ignore, asserts Chester. “However, the precarious fiscal position in which the government finds itself tempers enthusiasm for an overweight position.”
Michael Moyle, Co-Head of Multi-Asset at M&G Investment Managers, says that despite the negative headlines dominating the news cycle in SA this year, local equity and bond valuations are trading below historic averages, offering cheap investments with attractive potential returns, especially compared to their offshore counterparts.
“While we hold global equities and bonds in our multiasset portfolios, we have taken more neutral positions. In our view, future inflation, interest rates and growth still pose risks to global assets, which are not being adequately compensated for in asset valuations.”
In comparison, Moyle says prevailing valuations more than compensate for holding local equities and nominal government bonds.
“As such, we prefer these assets in our portfolios. Equally, the weak valuation of the rand against major global currencies supports our preference for local over global assets.”
Chester believes that both domestic and global equities offer compelling value at an overall level.
“We see significant stockpicking opportunities to drive alpha over and above the beta available. Companies that are returning excess cash to shareholders through dividends and buybacks are especially attractive.”
From a global perspective, Thirumalai says that US equities are generally overvalued while European equities are cheap in comparison, but event risk warrants a cautious approach to the region.
“The best value potentially lies in emerging market equities, with China offering a tactical opportunity with its potential for growth.”
And global credit markets offer another compelling investment opportunity, adds Chester.
“As global interest rates have moved higher, there is less pressure on a search for yield, which means credit spreads have opened up. Moreover, the recent US banking sector crisis and the Credit Suisse AT1 bond write-off have spooked global credit markets even further, making it an opportune time to invest.”
FROM AN ASSET ALLOCATION PERSPECTIVE, THE RETURN OF YIELD IN THE SOVEREIGN BOND MARKET IS A WELCOME EVENT