[TOP STORY] How investors can approach a turbulent year

‘As we march forward into a cyclical economic slowdown, you have to use…opportunities to diversify your portfolio, and get into the assets where you want to be’: Citadel CIO George Herman.

PETRI REDELINGHUYS: My name is Petri Redelinghuys. I am standing in for Simon Brown, who is gallivanting around the world. I hope he is having a great holiday. Right now we speak to George Herman, the chief investment officer from Citadel. Good morning, George.

GEORGE HERMAN: Good morning, Petri. How are you?

PETRI REDELINGHUYS: I’m all right. Thank you very much for your early morning. I appreciate your time today. I’ve got a few questions for you around essentially a press release that you guys put out – I think it was yesterday…. However, it sort of looks at climate change and it’s titled ‘Insights for another big year of turmoil and resilience’. You touch on a lot of different things here, talking about politics, pandemic, inflation, central banks, and environmental ESG prioritisation. There’s quite a few interesting topics that you go through here. I was wondering, in light of that, what is the approach that we can take or the investors can take or that you are taking for the next quarter, or for the rest of the year. We’ve seen the first quarter, where equities underperformed [and] commodities really did extremely well. Is this a theme that continues to play out for the rest of the year? Is the worst over? What’s your take?

GEORGE HERMAN: Well, there you go. It’s a turbulent year, indeed [with] a lot of things moving simultaneously. The end result of that is volatility in the financial markets. Yes, we do see that growth actually maintains itself, despite this combination of a cyclical slowdown as well as monetary tightening happening at the same time, because the big dragon to slay at the moment globally, is inflation. Interest rates will be rising and will be rising sharply. We haven’t seen that for more than a decade, and so the markets have to come to deal with that.

Your question was: how do we see this playing out? Well, we see this as a continuation of enormous volatility, but, as you know,

volatility has as many opportunities as risks attached to them.

So, as we march forward into a cyclical economic slowdown, you have to use those opportunities to diversify your portfolio, and get into the assets where you want to be. From the end of the year you have to [have started] that process already.

PETRI REDELINGHUYS: Yeah. It’s actually a double-edged sword – the volatility thing. It can be good. The traders will always say, ‘Oh, volatility is good for us,’ but it can be scary at times as well.

GEORGE HERMAN: In a long-term portfolio volatility can be your biggest enemy, because typically clients withdraw from their portfolios. And if they withdraw during a draw down, it really hurts a portfolio long term. That’s exactly why long-term financial planning is so important and sticking to your process.

PETRI REDELINGHUYS: To your long-term goals. I’ve actually got a lot of questions for you, but I’ll try and keep them as brief as possible. The Fed has to raise rates aggressively. They’ve got to get inflation down by around 4%. To bring inflation down that much they have to be quite aggressive with rate hikes, as you mentioned. What are the chances that we actually see a tightening cycle without a recession at this point? I think something like 11 out of 14 of the previous tightening cycles since World War II have led to recession.

GEORGE HERMAN: Well, it’s a foregone conclusion.

We are going to eventually get to a recession. The question is: does the action of the Fed cause that recession, or does the world progress in its natural cycle and get to an economic slowdown and a recession period maybe two years down the line?

That’s the major difference.

So the risk you’ve highlighted is that the Fed steps on the brakes too hard, too quickly. We know that monetary policy is a super-blunt tool in cooling down economic activity to get inflation down. You and I know for a fact, we are not going to see 4% inflation in the US by the end of this year. Inflation is more sticky and more troublesome due to the war, commodity prices, and so forth, which are very widely spread. So this is going to take longer and, to answer your question, the risk of a Fed-induced recession has grown immensely.

PETRI REDELINGHUYS: All right. So then, bringing it back locally, how do we position for this? Is there anything that we do to [defend against] this? Do we stay invested in commodities and energy?

GEORGE HERMAN: South Africa’s pretty fortunate in the sense that we do have positive exposure to the commodities. Also, you now have a bifurcated commodity market essentially around the world – anybody who can transact with Russia, and anybody who can’t transact with Russia. So the beneficiary of some of that, which is fantastic. If we can keep our logistical lines going, if we can get the increased volume of commodities exported – that is the crucial question.

So yes, you have to stay positively exposed to commodities today.

PETRI REDELINGHUYS: All right. I think we are going to have a challenge since one of our ports is essentially non-functioning at this point.

GEORGE HERMAN: Yep.

PETRI REDELINGHUYS: Unfortunately we are out of time. thank you very much, George. I wish we had more time. I’ve got lots and lots of additional questions. I hope you have a wonderful day. That was George Herman, the chief investment officer at Citadel.

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