Positioning portfolios during these uncertain times

By: Mohammed Sibda, Portfolio Manager at Momentum Investments

Global and local markets have been jittery since the start of the year as investors had to deal with a number of factors. From a global perspective, persistent inflation numbers above central bank targets have resulted in further interest rate hikes across the developed world which in turn has created concerns of a slowdown in global growth. Continued tensions between the United States and China have also contributed to investor anxiety and the on-going Russian-Ukrainian war added a further impediment to investor sentiment.

Locally, we have a cocktail of challenges which include elevated levels of loadshedding, higher interest rates, weakening fiscal metrics, a currency under pressure and a poor economic outlook in the shorter term.

Just like other investments managers, we don’t know how or when the above will be resolved. However, we can position our client portfolios to provide them with highest probability of achieving their objectives over the medium to longer term.

To navigate through this particular period of uncertainty we have gradually been increasing our global allocations across our portfolios from the latter part of 2022. The increase is predominantly through higher allocations to the defensive asset classes (bonds and cash), as both these asset classes have provided better entry points and will also provide greater downside protection in risk-off periods.

This has been funded predominantly from banking the strong gains in local equity. We still, however, retain a healthy allocation to local equity and global equity across our portfolio range. We believe local equity in particular has the potential to deliver decent inflation beating returns over the next three to five years. South African (SA) equity is still trading at a discount to its long-term averages and is also cheaper (on a price-earnings basis) than most developed markets.

Despite the negative sentiment towards SA, we think investors are being compensated for these risks. We are aware of potential value traps but are confident in our active managers’ stock picking abilities. It is also worth noting that a large number of the companies listed on the JSE derive most of their revenues offshore and have very little exposure to the SA economy. We are also comfortable with our style diversification and we continue to hold a diversified equity portfolio consisting of resources, rand hedge industrial stocks, defensive consumer stocks, as well as selective attractively priced SA orientated banks and retailers which offer significant upside returns over the medium to long term.

Within SA fixed income we have reduced our longer-dated bond exposure and increased our cash allocation. Cash rates are at very attractive levels given the spate of rate hikes over the last 18 months and also increases the defensive asset class exposure.

We continue to have a cautious outlook on local and global property and retain our underweight positions to these asset classes. We understand that investors naturally feel uneasy in periods of high uncertainty. However, the importance of staying invested – sometimes seen by many as a cliché – cannot be underestimated. After the collapse in asset class prices in the first quarter of 2020 (due to uncertainty over the Covid-19 pandemic), the last three years have probably provided enough proof that markets generally do recover and find a way to surprise many investors, and reward those who stayed invested.

Each investor is unique, which is why we help construct investment portfolios or funds based on what your client wants to achieve, how much they have to invest, and when they need the money by. Outcome-based investing is about placing your client’s goals at the centre of the investment process, and maximising the probability of them achieving those goals, while ensuring portfolios remain flexible and diversified to provide an attractive risk-adjusted return that gives a more consistent investment experience over time, limiting the temptation of market timing.

Momentum Investments has a range of funds to suit all investor needs – for more information visit momentum.co.za.

Momentum Investments is part of Momentum Metropolitan Life Limited, an authorised financial services (FSP6406) and registered credit (NCRCP173) provider.