CIO Karl Leinberger shares his views on the opportunities and challenges for investors in 2022 and beyond

The following views are excerpts from Citywire interviews conducted by Justin Brown with a selection of portfolio managers. Below are the views of Coronation’s CIO, Karl Leinberger. Links to the full articles as published on 3 and 4 January 2022 are included after each section.

The equity opportunities these SA fund managers see in 2022

We have come through this incredible global equity and bond bull market. It is astounding how fully priced equities and bonds are. We thought global markets were quite full before Covid-19, yet the S&P 500 index has risen more than one third from pre-Covid. 

I think that is an issue for traders around the world. The last time global equities were quite expensive was in 2000. Over the next eight years, you had zero return, which put a lot of stress on the savings industry. So, I would not be surprised if we have quite a miserable decade ahead. I would expect very anaemic returns from bonds and international equities.  We went very aggressively into domestic assets during the Covid selloff in 2020 when domestic assets were extremely cheap and global assets were fully valued. So, my big worry is that South African investors are light domestic assets and heavy offshore assets. That is a particular worry because we have high inflation in South Africa. 

We still see the best opportunity for risk-adjusted returns in the domestic markets for the next few years. There are opportunities in South African bonds, equity and property in 2022 and beyond. Of course, there are always stock-picking opportunities globally, but I don’t expect the indices to do well. In local bonds, we think the best prospects lie at the back end of the yield curve. 

In equities, we believe there is a lot of value in diversified miners like Glencore and Anglo American. Prosus is incredibly cheap, but it comes with China risk. We think Tencent is performing well and is very affordable. Finally, gold shares look very attractive, especially AngloGold Ashanti and Gold Fields. Coronation thinks there has been a dramatic improvement in the fundamentals of these two companies that the market is not giving them credit for. We believe gold is cheap protection in a time of heightened risk.  

Read the full article here.

The asset allocation challenges these top SA managers expect to face in 2022

The Coronation Balanced Plus fund has a large weighting to equities, especially domestic assets. It has a much higher weighting in bonds than in the past 10 years, and that weighting is at the back end of the yield curve. The fund has minimal exposure to global bonds and is underweight in global equities. There is a risk that global equities will have a poor year because there is so much irrational exuberance. There is a high risk that local equities will have a very poor 2022 as well. 

On bonds, South African state debt is on a knife-edge, and there is a risk that the government will lose its fiscal sustainability. We need to see fiscal discipline from the finance minister. South Africa is flirting with a debt trap. We have got rising inflation and interest rates. There is a lot to worry about.  The Coronation Balanced fund has a 51% allocation to domestic equities. If equities fall off, we will buy more, and if equities get stronger, we will take a little off.  The fund has a 20% allocation to bonds. If we lose confidence in government fiscal discipline, we will reduce that weighting. The fund has a 21% weighting to international equities.

If global equities have another strong year, we will take profits. If domestic and global equities do well, we will consider investing the money in cash or bonds. A significant event next year will be the ANC elective conference. The market expects Cyril Ramaphosa to win another term as ANC president. I think that is crucial.

There is a low probability that ANC delegates would not re-elect him, but it would be a disruptive event if it does happen.  Eskom is another big issue that investors will be watching. Do we have meaningful load-shedding? Are they able to make any progress with improving maintenance and grid reliability? The big issue is the performance of the South African economy, particularly as it has slowed in the last month or two. All that pent up demand is out of the economic system, and employment has meaningfully lagged the economic recovery.

Read the full article here.