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Positioning for moderating inflation

In the SA market ‘we’ve gone underweight commodities and basically have allocated that position towards the financial sector and specifically banks’: Henk Viljoen, Stanlib Balanced and Equity portfolio manager.

SIMON BROWN: I’m chatting with Henk Viljoen [senior portfolio manager in the Stanlib Balanced and Equity team]. Henk, I appreciate your time today. If we step back and look at the big picture, in a sense it’s looking like lower growth is moderating inflation globally and locally. How do investors position themselves for this potential outcome?

HENK VILJOEN: Thank you, Simon. I think we’re living in very interesting times. We’ve seen quite a large recovery in most global economies, with growth picking up remarkably. The Delta virus is obviously causing quite some anxiety in many of the D……0:52 markets at the moment. In South Africa, we’ve had a very strong commodity recovery, and that seems to be rolling over and certainly bodes negatively for SA earnings growth in many sectors. 

The other thing I think that’s also happened is that globally we see a number of bottlenecks develop for inflation, and that’s causing inflation to spike. But our view would be that from these levels we’ll see a slight moderation in growth. We don’t see growth disappearing dramatically, but we definitely see a moderation.

And in SA specifically, we are looking for growth to probably moderate towards somewhere around 2% to 2.5%, barring any specific policy changes or further recoveries in commodity prices from current levels. 

As far as the bottleneck on inflation is concerned, we do believe that that will be unwinding and that on a 12-month view we should certainly see some moderation in inflation.

SIMON BROWN: The keyword there – this is not an end-of-the-world collapse – is moderation. That stands in well stead. Particularly locally heavy lifting has been from those commodities. What does this mean for equity positions in your fund? Have you’ve been pulling back a bit on equity?

HENK VILJOEN: If you look at our overall fund – and maybe just to be specific about a balanced cautious fund like ours – you are able to invest up to a maximum of 40% in equities.

We have a very specific overweight to global equities at the moment, with a spread between (the) general Global Equity Fund and quite a big allocation to both emerging markets and the European area of investment. 

As far as the SA market is concerned, we have been pulling back on our commodity holdings, so we’ve gone underweight commodities and basically have allocated that position towards the financial sector and specifically banks, because we still think that there is still quite a nice earnings recovery from the banks.

But on a general overview basis, we are underweight SA relative to being overweight international equities.

SIMON BROWN: And then own 40% max equities. It’s a cautious fund, and that’s what that fixed-interest component is going to do. That gives you the base, that would give you your return clocking in month by month, quarter by quarter, year by year. The equities then come on top and you can manage that percentage as you see fit.

HENK VILJOEN: If we can specifically refer to the fixed-interest component of the fund, I think at Stanlib we were very optimistic about government reducing its auction sizes, which has happened this year, and government finances turning out to be much better, specifically in the light of this great recovery in commodity prices. We know government is looking for as much as R100 billion of additional revenue from that. 

For us much of that has played out. So we have pulled back a little bit on our bond position. But at the same time, we’ve introduced inflation interest into our fund, a 5% holding in that, and we are still holding a position of 6% in property, which we think is a good recovery story, but not a big overweight in our portfolio. 

And then last but not least, we also have an allocation of 7% to global emerging market debt, which we’ve done through a company called Brandywine, which has a very good track record in being able to manage currency and emerging-market bond exposure over time.

SIMON BROWN: A cautious fund such as this – is this situation-specific? For an investor at this point, referencing back to what we talked about at the top of the conversation around moderating global growth locally, as well as inflation, is a cautious fund specifically for this type of market, or is it something which actually an investor could look at and say, you know what, it is going to take some volatility out of the equation for me, and actually it is a fair fund for all weather types.

HENK VILJOEN: I think that’s a very good question. At this point in time, I think we’ve seen quite a remarkable recovery in equity markets.

Fixed-interest markets in South Africa with the steepness of the yield curve are offering a very attractive real yield, and obviously, we are invested to capture that real yield.

With many investors sitting in things like money market funds, where there’s no real yield available, I think being invested slightly less conservatively is attractive. 

And then on the other hand for people that have been heavily exposed to equity and risk assets, it probably also makes sense to pare back some of that risk. Therefore the Balanced Cautious Fund with 40% equities, roughly 60% fixed interest, spread over a different set of asset classes, certainly makes a really good investment case for an investor over the short- to medium term, we believe.

SIMON BROWN: And certainly takes some of the volatility out. I keep bringing it back to markets have run well, but those commodities are looking wobbly. Those PGM prices are under pressure. Neal Froneman was saying that rhodium’s at $10 000, palladium at R2 000/oz. 

We’ll leave it there. Henk Viljoen, portfolio manager, Stanlib Balanced and Equities, I really appreciate your time today, sir.

Listen to Friday’s full MoneywebNOW podcast here.

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