SIMON BROWN: I’m chatting now with Schalk Louw from PSG Old Oak. Schalk, I appreciate the early morning during your summer holidays. I’ve got to say I thought I was a market nerd, but I think you top me on this. You were going through the forecasts released by all the large investment houses, and you collated them together. [There are] a couple of big themes.
The big concerning theme is obviously inflation. We’ve seen South Africa’s inflation now. We saw it in the UK and Canada yesterday, the US last week. Certainly the inflation worry is real and is happening out there.
SCHALK LOUW: Good morning, Simon and good morning to all the Moneyweb listeners. Well, let’s add to that point, Simon, that we clearly now know it’s not transitory. It might have been the word of the year, most probably the word of the decade, but yeah, inflation is definitely [a concern]. When you look at these reports, I think that is the main theme that came through and it’s evident where we are sitting.
Looking at some of these commodity prices, oil prices, food prices, I don’t foresee that becoming less of a problem.
I think BlackRock mentioned it the best when they said, “We flagged inflation. Now we are living with inflation”. That’s pretty much it, and I don’t foresee that changing soon.
SIMON BROWN: I suppose in a sense, to coin a cliché, it’s ‘the new normal’.
The other big story was commodities – of course very important for our economy or a commodity economy. We’ve seen PGMs moving a bit this morning; yesterday gold; certainly oil. The short version is, and you make the point, if you thought the commodity run had reached its peak, you might want to think again. The commodities have more space for upside.
SCHALK LOUW: Yes. That’s my second favourite, Simon. Last year everybody, or let’s call it everybody, [or] the consensus, was calling it the top of the commodity cycle, the commodity boom. And here we are sitting a year later and clearly [it’s not so].
Let’s say all these investment houses are convinced that precious metals are set to still deliver a shimmering performance for 2022, the consensus is still that oil is the commodity offering the best value.
Looking at some of these things, Morgan Stanley actually came out at the end of last year, when they brought out their 2022 outlook, saying that oil could top $90/barrel in 2022, a rising demand. They mentioned the supply chain. Hey, we are here at $90 already, so here we go. It’s not even the end of January. So that is a clear worry, and a clear worry again for inflation.
SIMON BROWN: Jefferies [Insights] is out there saying oil at $150/barrel, but I remember the calls for oil at $200/barrel way back in 2008. There’s always someone out there.
Fixed-income marketers are not looking at that. They’re saying nope. Credit Suisse says, quite frankly, government bond yields are likely [to] deliver negative returns. It is still equities, but maybe it’s value equities for a change and it’s been a long time since we could have said that.
SCHALK LOUW: We’ve had this theme. I think halfway through last year I [was] really harping on this whole value thing, and look where we are now. We’ve seen it. Look at the first part of this year – I wouldn’t say it’s a total reversion, but clearly some reversion. In a BNP Paribas view – I love their view – they said that the wide valuation gap between value and growth stocks and the prospect of high interest rates suggests upside is ahead.
And then Vanguard actually discouraged. They said ‘for US investors, this modest return outlook belies opportunities for those investing broadly outside their home market’. We’ve seen the US for the past few days, or week-and-a-half, cleaning out the place, and then they continue to say they think value stocks are still more attractive than growth stocks. There’s a definite golden thread among these large investment houses. So I would definitely encourage all the listeners to go and look at some of these value ETFs, value fund managers and value stocks if you manage your own equity portfolio.
SIMON BROWN: And there are some ETFs, both local and global, which can do that for you easily. Or you can do the old-fashioned way and go find some great value stocks. It’s going to be weird, because we’ve had the US absolutely booming for a decade; value has been nowhere, and now suddenly maybe times are changing.
Schalk Louw from PSG Old Oak, I always appreciate the early morning.
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