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SIMON BROWN: I’m chatting with Luigi Marinus. He is a portfolio manager at PPS Investments. Luigi, if we look back initially, last year was a particularly tough year for investors, [with] volatile bear markets in the US. So far 2023 has been much better, particularly in the US – especially technology [and] the Nasdaq.
LUIGI MARINUS: Hi, Simon. Yes, that’s correct. I think that took us a bit by surprise, the way the market ended 2022 and started 2023. We were not really seeing that global marketing particularly going to be doing that well. I think what happened was actually inflation- and interest-rate related. We know last year there was difficulty in the market, particularly because inflation increased so quickly in the US in particular, and they were quite slow to increase interest rates. And so we saw inflation peaking close to 10% in the US.
And then, towards the end of the year, we actually saw that inflation start coming down after the US started increasing interest rates and speaking a bit more hawkishly on markets as well.
So what happened? I think the market got a bit excited about that and started seeing the prospect of interest rates actually coming down sooner than previously expected. What normally happens when markets start going down is that you see a good environment for equity markets – and we started seeing equity markets began increasing.
From an inflation perspective we actually saw the US, like I said, go from close to 10% to actually around 5% this year. So it was quite a sharp decline in reply to those increases in interest rates that we saw.
SIMON BROWN: We didn’t get the same level of inflation in terms of the highs, and we are also not moving down as fast as the US. Ours is a lot more sticky.
But locally it has been about industrials. Resources and financials are struggling. If you look at the other asset classes – maybe we can throw cash and bonds in there – it really has been a more moderated performance locally and, as I said, financials and resources are not doing well at all, really.
LUIGI MARINUS: Yes. That’s a good observation. That’s exactly how we saw it. If you look at the year to date, the US market or the MCI that we would look at is up more than 20%. Our market’s up only about 4% and definitely concentrated on the industrial side. A big portion of that, if you look at it in the terms of rand returns globally, is the weakness of the rand as well. So, from an investment perspective we’ve benefitted from that.
From a local South African perspective that’s a slightly different story as well. That’s part of the reason why we also saw industrials doing well locally. We have some rand-hedge stocks in that portion of the portfolio, and that means that some of those earnings or a fairly large portion of the earnings of some of those companies is in dollars or in stronger currencies than the rand. So we’ve benefited from that locally as well.
But, that being said, even if we think about the fairly negative situation that we see South Africa in at the moment from a macro perspective, a 4% positive return from our equity market is not really such a bad return.
I think in normal circumstances we would have maybe expected negative returns in our equity market. You’ve probably heard the saying, ‘It feels like we are climbing the wall of worry’ – and that’s what it feels like in from a South African perspective.
We know of course financials came under particular difficulty in the first quarter when global banks came under a bit of difficulty. That does tend to happen when interest rates go up and some banks face some difficulty. We saw [it] in the US and in Switzerland, well spoken about by this time. But it seems, hopefully, that was somewhat isolated. We haven’t seen a lot more difficulties from other banks in that regard. But still [there are] difficult market conditions for those areas of the markets.
SIMON BROWN: Yes, and I take your point; 4% is not a lot, but it feels like a lot in the environment we are sitting in
Looking forward, in a note you sent out, you said your tactical asset allocation remains somewhat conservative, and that you are having debates around your overweight exposure to domestic bond positions.
LUIGI MARINUS: Correct. That’s exactly right. From a growth-market perspective, we’ve been a bit on the conservative side. In hindsight we’ll probably say that we were a bit early, especially on the global side. But we don’t necessarily think it’s the opportunity now to kind of jump in with both feet. We’ll take the positive markets in the back pocket, but we still think that, with a possible US recession, being too aggressive on the equity markets front might be a bit presumptuous. So we’d rather be a bit more careful.
On the bond side of course we had that, let’s say, scare last week when the US Ambassador spoke negatively about South Africa, and how the rand definitely reacted, bond yields reacted, and we were of the opinion that we need to scale back our bond exposure. We’ve been starting to do that. It’s a difficult trade actually, because yields in the bond market are actually very good from a South African perspective compared to global levels.
To kind of put it in perspective, we’re not concerned that that the government or the Treasury won’t be able to pay back the bonds. We just think that the risk of yields continuing to edge slightly higher is there. On a relative trade, cash is actually giving a very good return at the moment. Twelve months forward on a very low-risk cash trade we can get 9% at the moment. So that relative trade comes into play. It’s more about how much risk you are willing to take for the returns that you can get.
And that was the kind of main catalyst for our decision to start to reduce our local bond exposure and increase the cash exposure. Normally when managers talk about increasing cash, you think about the diversification benefits and you just have to reduce risk. But there’s a double trait [in] that at the moment. Yes, it does reduce risk and reduce volatility in portfolios, but you’re actually getting a very constructive return from cash. So I don’t think that can be overlooked at the moment.
SIMON BROWN: Yes, 9% in cash is a proper return. And I like that analogy. It is a low risk at 9%.
We’ll leave it there. Luigi Marinus, portfolio manager at PPS Investments, I appreciate the time today.
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