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2023 market outlook:
what can we expect?
Sanlam Private Wealth
Feb 13, 2023
Listen to the views of Alwyn and David here.
Here’s a transcription of the video:
Alwyn van der Merwe, Director of Investments:
Good morning, and welcome to the 2023 market preview of Sanlam Private Wealth. What I would like to do is give a review of what has happened in 2022, and then it will give me great pleasure to hand over to David Lerche, who is my successor as Chief Investment Officer at Sanlam Private Wealth. Dave will give his views in terms of the outlook for 2023.
The easy part is always to look back at what has happened in financial markets and in the macro environment over the previous 12 months. I think the most common way that people describe 2022 is that it was a tumultuous year. What does this mean? It simply means that we had enormous declines in asset prices across different asset classes during 2022.
How did it happen? In the first place, when we started 2022, many of you might remember that late in 2021, we argued that both bond markets or bond prices, and of course equity prices, were quite elevated or expensive. When the starting point is high, those asset prices don’t price any bad news in.
I think three things happened during 2022 that had a massive impact on financial prices. The first thing is as a result of the war – and the war was of course something that nobody could have forecast – but as a result of the war between Ukraine and Russia, energy prices went up significantly. That was a factor that helped inflation rates go up to levels that we’ve only seen back in the 1970s.
Of course, the natural response by central banks, who artificially kept interest rates very low since Covid-19, was that interest rates went up significantly during the year. And because the price of money has gone up, the prices of other asset classes came under severe pressure. The uncertainty associated with the war of course created uncertainty in terms of economic outcomes, in terms of growth and therefore also company earnings.
The net result was that at mid-October, since the beginning of the year, equity prices in the US, as measured by the S&P, were down by about 25%. And then if you look at the darling of the 2021 market, the NASDAQ index – that was down by 34.4% for the 10 months at that particular point in time.
So there was an awful amount of pain in the equity markets. Unfortunately, that is not where it ended. I have mentioned that bond prices were also quite expensive – in fact, not ‘quite expensive’: bond prices were expensive at the beginning of the year. Yields were simply too low and when inflation went up, those yields responded. We have seen that 10-year government bond yields in the US went up by 240 basis points or, for the full year, lost more than 10% in terms of value.
If you conclude with the full-year performance, the NASDAQ was down about 27%. US equities were down 12% and global equities, as measured by the MSCI World Index, were down 12% for the full year. South Africa was certainly an area where we have shared the direction in global equity markets, but the pain was not that severe. So when we look at the full year, as a result of the recovery that we’ve seen in the fourth quarter, equities in South Africa ended the year up just shy of 4%.
If we look at our own portfolios, many of you would have recalled that we were quite sceptical about the outlook for markets, so in most of our portfolios – we looked at the equity portfolios and the multi-asset portfolios both locally and globally – we were quite conservative in the positioning of the assets that we included in these portfolios. To put it in very simple English: we dodged many bullets during the year.
If you look at our South African equity fund performance, we’ve done particularly well. As I’ve said, our own market went up by about 3.7%, our own portfolios went up by 7.7%. So after costs, we’ve beaten the index by 400 basis points and certainly added value to the portfolios or the wealth of our clients during this year.
If you look at the multi-asset portfolios, again, it’s really just the same story. Relative to competitors in their particular spaces, we have outperformed the benchmarks by anything between 200 and 350 basis points. Then of course we started a portfolio range, the offshore range, about 2.5 years ago where we’ve got four risk buckets invested in offshore assets, and all four those portfolios have outperformed their particular benchmarks between 350 and 400 basis points during the year.
So although it was a tumultuous year, the active portfolio management that we have done during the year, and given the more conservative approach that we had to investments as a result of the very high starting point – not because we could forecast many of the things that have happened but because of the high starting point, and we know the dangers associated with high asset prices – we have certainly added value. So as a result of the conservative positioning that we have implemented in our portfolios, it has worked very well for our clients.
It is also true to say that the fact that many of the assets sold down to values that are more palatable to us, allowed us to manage portfolios actively and use some of these massive price movements to the benefit of our clients during the year.
So from my side, this is the final feedback that you will receive from me. I’m going to retire at the end of March. I had a wonderful 15 years as the CIO of Sanlam Private Wealth, and it gives me great pleasure to welcome David Lerche, who will be my successor. I want to wish Dave all the best. We leave him with a team and with portfolios that are in good shape, and I’m convinced that Dave will continue the work and add value to portfolios for the next investment cycle. Thank you very much.
David Lerche, Chief Investment Officer:
As Alwyn said, Sanlam Private Wealth’s investment philosophy has worked very effectively for nearly two decades now, delivering returns for our clients ahead of both the markets and most of our peers. As I take over as Chief Investment Officer, I would like to assure our clients that Sanlam Private Wealth’s investment philosophy will remain consistent. We will continue to view price as the most important factor in determining future returns on various assets, and we will continue to make sure that we have the correct perspective on both asset-level events as well as global macro events, and that we take cognizance of the patterns of human behaviour which are evident across markets and tend to shape market sentiment – and blending those factors together to make sure that we deliver our clients’ portfolios that are appropriate for their risk appetite and should be able to beat their benchmarks over time.
Looking ahead to 2023, we certainly expect better returns from assets in terms of prices. The global economy has of course slowed and we expect that to continue through this year. But we do view markets as already having baked that into prices. Despite the ongoing war in Ukraine and its terrible humanitarian cost, the European economy begins 2023 on a better footing than many would have expected, given the decline in gas prices. That of course has removed a substantial pressure point for both consumers and businesses in the EU region.
China is also in a better position than it was at our last quarterly update. The end of Covid-19 restrictions in that country after nearly three years of lockdowns leads us to expect that economy to rebound quite strongly through 2023. That of course is positive not only for Chinese businesses but also for global supply chains and should help to ease some of the pressure on inflation through this year.
When we look at individual asset classes, the most obvious change from a year ago is of course the increase in interest rates, which Alwyn discussed. We’ve moved from an environment in late 2021 and early 2022 where there were few reasonable alternatives to equities, to one now where interest rates are more attractive and therefore there are a variety of realistic alternatives for investors’ money to be deployed towards.
When we look at the investment clock, it is clear that economic activity is slowing in response to these rising interest rates. Global inflation is clearly slowing from the multi-decade highs that we saw last year, but it does still remain above central bank target ranges. Because of that, we think that while we expect interest rates to stop rising within the next few months, probably by April or May, it will likely be some time before those interest rates are brought down again, as central banks need to rebuild their credibility and make sure that inflation is properly under control before dropping rates.
On global bonds, US short-term yields are now at their highest level since before the financial crisis. If one were to buy a US 10-year government bond and hold it to maturity, you can now for the first time in many years expect positive real returns.
When we look at global equities, prices are definitely more attractive than they were a year ago given the steep declines through 2022. Despite last year’s fall, though, US equities still appear a little bit expensive but contrasting that, European and UK equities do look quite attractively priced. It seems as though in those countries the potential for a recession is fully priced into those stocks there.
Chinese equities turned the corner in late 2022 and have rallied quite sharply over the last few months. But despite this rally, we do still see valuations there as quite attractive. The Chinese economy is out of sync with the rest of the world at the moment, and that should actually prove quite supportive to global growth in 2023.
When we look at the South African equity market, valuations are cheap. This of course reflects the impact of ongoing loadshedding, which acts as a handbrake on economic growth. Worth remembering is that well more than half of the profits generated by JSE-listed companies are generated outside of South Africa. In terms of property, both globally and in South Africa, while valuations on the surface appear reasonably attractive, our view is that these asset classes are closer to fair value.
And then finally, when talking about alternative assets, which were particularly popular this time last year when there were few alternatives, we now have a variety of other options that can deliver decent returns potentially, so the relative attractiveness of alternatives has diminished somewhat.
In conclusion, as we position our client portfolios for 2023 and beyond, we’re fully aware that the future remains uncertain, but that is of course always the case. We take comfort from the fact that asset prices globally do appear reasonable, and so while we are not super bullish for this year, we do still expect investors to be rewarded for the risks that they take in real terms. Thus our view is that asset class returns this year will be both positive as well as far better than they were last year.
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