By George Herman, Citadel Chief Investment Officer
Many South Africans are understandably concerned about what the future may hold for their investments. As wealth management specialists, we look at the world through wide and long lenses – and as such are guided by insights and strategy, rather than emotion.
THE INVESTMENT CLIMATE
Global growth is slowing down somewhat, and consumption spending is under pressure from higher energy costs, however, unemployment around the world is at very low levels which is good news for longer-term global economic recovery. South Africa is the outlier in this regard, with its record high unemployment rates, but the local economy is boosted by low interest rates and record high commodity prices. Globally, new trading relationships are being formed as supply chains are re-organised, creating new opportunities.
THE FIVE FACTORS DEFINING THE WORLD OF INVESTMENTS IN 2022
1. VOLATILE GEOPOLITICS
The protracted war between Russia and Ukraine is affecting millions of human lives and global post-pandemic political-economic stabilisation. The volatility of the situation is affecting a multitude of asset classes, however, it is not an outright disaster for global markets. Geopolitical risks are a constant consideration. What we are seeing as side-effects of the war is that Europe has not been this united in a long time, necessity is driving some ingenuity, innovation and re-organisation of old systems, and volatility does create investment opportunity if you know where to look. The war’s global effects, however, will be felt via commodity prices and changes in trade partnerships and supply chains. Mass shortages due to the intensified sanctions on Russia will cause major inflation and affect the decisions of central banks. Clearly interest rates are going to rise rapidly and monetary conditions will tighten more this year. Having said that, we do not anticipate a global recession in the next 12 months as United States (US) consumer balance sheets are very strong and not directly affected by the war.
2. THE WANING PANDEMIC
The possibility of new variants and setbacks still exists; however, it does seem as though we are on the backend of the pandemic’s impact on global growth dynamics. As the pandemic is lifting and economies have opened, consumers are releasing that pent-up demand for goods which is supporting growth, particularly in the United States. Europe is bound to suffer more due to the war and China is clamping down hard on mobility to contain the spread of Covid-19.
The war and ensuing sanctions on Russia have caused havoc in global commodity markets as Russian supplies instantaneously became unavailable. Supply deficits in a wide variety of commodities now exist and new supply agreements and logistical channels need to be established. This takes time and, as a result, many commodity prices have shot through the roof, causing an immense inflationary impulse. Inflation rose rapidly in many sectors and countries around the world have been affected, from food to oil. For context, the US is experiencing the highest inflation figures in over 40 years.
4. CENTRAL BANK ACTIONS/REACTIONS
While South Africa is experiencing a relatively low inflation impulse, global central banks are under enormous pressure to act decisively. We will see interest rate increases along with a rollback of other monetary stimulus measures, all of which will add to a tighter global monetary environment. This has an impact on asset valuations, growth expectations, foreign exchange rates and volatility as the markets adjust. The risk is that central banks overdo the tightening and therefore stifle economic growth. Central banks are also in a global race to launch central bank digital currencies (CBDCs) – a phenomenon we are seeing around the world from the major economies all the way to island nations.
5. ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) PRIORITISATION
I believe that building greener economies is not only vital for the survival of our species, but also beneficial in building new industries, jobs, innovations, and export opportunities in the short term. The commodity boom that South Africa is experiencing, especially in terms of Platinum Group Metals (PGMs) that are used in green technologies, is boosting our economy. PGMs currently contribute about 50% of South Africa’s resource basket and will likely increase as more green industries emerge globally requiring the metals and minerals that we produce. On the flipside, decarbonisation has major consequences for carbon intensive developing countries like South Africa. Be that as it may, socially responsible, green investing will boom in the next couple of years.
THE LOCAL PICTURE AND MAKING SOLID INVESTMENT DECISIONS
South Africa is faced with challenges. Abstaining twice from the recent votes on Russia at the United Nations will have repercussions for our global standing. We also have a multitude of socio-economic and corruption issues that need to be addressed. That said, taking all your money offshore because you are worried about South Africa is not an investment strategy, it’s an emotional bet likely overlooking all the facts.
We cannot be swayed by emotions such as optimism or pessimism. Citadel specialises in crafting investment mandates that are appropriate for each client’s lifestyle and ensure that their liabilities are covered by appropriate assets.
A key part of Citadel’s strategy is to build inter-generational financial security, and this is based on strategies that can weather pandemics, recessions, market crashes and the like. Our investment team abides by an investment philosophy that rests on four pillars that carry us through volatile times:
1. The future is uncertain and will surprise,
2. Asset allocation determines long-term investment outcomes,
3. Valuation is crucial, and
4. Manage all risks all the time.
Diversification is another way in which we reduce volatility in investments. As such, Citadel is launching three new global multi-asset funds through our Guernsey business in April 2022. These funds are comparable to the classifications we know in the South African multi-asset space, with low equity, medium equity and high equity options available for private clients and our global pension fund clients. The focus of these funds is on active asset allocation (i.e. changing the mix of cash, bonds, credit, equity and commodities), while passive ETFs will be used to gain exposure to the different global asset classes. These funds are also priced cheaper than the average price of the peer groups they fall under.
Despite the challenges, we are optimistic that 2022 will be a rebound year, but life and the markets are uncertain and cyclical, so the focus is on creating financial freedom within these constraints. People who have worked hard to build their wealth want the freedom to choose their own path. Just like an aircraft is built to withstand turbulence and a ship is built to withstand storms, so too is our approach to private client wealth management. It is built to withstand volatility and get the client to the end-goal.
George Herman is the Citadel Chief Investment Officer