Peter Brooke  00:00

Good day. My name is Peter Brooke and I'm a Portfolio Manager at the Old Mutual Investment Group. This is Macro Perspective Number 50 of 2020, and I'm going to talk about themes. 

Two times a year, we do a themes process, where we get away from the noise of the markets and look at the big longer-term drivers or themes. This month, we have done intensive sessions on the value versus growth rotation, South Africa's debt trap, long-term winners and losers in the equity space, and this week is our key investment ideas and strategic asset allocation.

One of the most challenging elements of this process is time frame or what we call road map. For instance, we are fairly bullish on South Africa's short-term outlook. This is on the back of recovery from a low base, easy global liquidity, a commodity bull market, and a current account surplus. 

However, longer term, the damage to our fiscus from this year will make it hard to avoid a debt trap. In this circumstance, we must balance off our short-term tactical outlook, which is positive, versus our more negative longer-term secular outlook. For instance, if South Africa fails to manage its debt burden, it will result in accelerating inflation. Equity and property are then better hedges against us than bonds. While in the short term, all three asset classes benefit from the better environment. 

Therefore, SA bonds, while still offering exceptional real yields, are less attractive than they were relative to South African equity and property. Where we are very clear is that the least attractive asset class locally is South African cash. We have cut our expected real returns on SA cash to zero. This is driven by inflation picking up, removing the small positive yield. 

The other change in relative rating is on global equity. While we are optimistic about the earnings recovery next year, markets have already reacted to this, pushing up share prices sharply. Therefore, we have cut our expected returns from global equity. We think 2021 will be more about alpha than beta, i.e. the difference between the shares, rather than a market that continues to run up, unhindered by gravity. As we highlighted earlier, there will be a continued rotation from growth to value, favouring non-US equity markets. South Africa is well placed in this type of an environment. And we think South African equity will outperform global equity in 2021. 

I'll talk more about these views next year, as this is my last voice note of 2020. I'm taking some leave and we'll be hiking the Tsitsikamma over New Year, followed by a week in Nature's Valley. I wish everyone a great break and keep safe. Thank you for listening to my voice notes over the year, and I hope you've enjoyed a different perspective. Until then.