Investec Wealth & Investment’s Global Investment Strategy Group (GISG) has opted to keep its risk score at neutral, noting how the outlook for profits and dividends have stopped deteriorating.

“Covid-19 risks have not been removed, but they are diminishing and are largely near term. Risks are balanced, to the upside as well as to the downside, but the magnitude of investment downside has been underwritten by the ‘whatever it takes’ global fiscal and monetary policy response,” says Chris Holdsworth, chief investment strategist, Investec Wealth & Investment.

Led by the US Federal Reserve, the global financial “plumbing” (the interaction of the banking system with financial markets) has been tested and found resilient. Thanks to this, there will likely be no re-run of the Global Financial Crisis (GFC) when the financial system became a multiplier of economic damage.

By the GISG’s estimate, global equities are pricing in a 20% decline in dividends over the next 12 months. “We think that there is a material chance of dividends surprising on the upside over the coming 12 months,” says Holdsworth. “However, given the prevailing uncertainty, a reasonable margin of safety in equities is warranted, hence our decision to remain at neutral.”

Turning to the local market, the SA asset allocation committee has retained its overweight recommendation in SA bonds. Despite the deteriorating SA fiscal position, the SA bond market offers a significant margin of safety.

Holdsworth says that should the state’s fiscal position deteriorate by more than the committee’s expectation, the expectation is that the state will intervene to shift the burden to taxpayers and/or pensioners, which ultimately will disadvantage “SA Inc” (shares whose fortunes are linked to the performance of the local economy) equities relative to bonds.

“While SA equities appear cheap, the medium-term outlook for the SA economy is fraught with uncertainty. In other words, the large margin of safety currently priced into SA equities is well deserved,” notes Holdsworth.

“Commodity producers have a large margin of safety priced in too, but the current global recovery and still weak rand are likely to provide significant support to their share prices, in our view. Within the SA equities universe, we have a clear preference for commodity producers over SA Inc shares,” he adds.

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Holdsworth says the committee’s favoured hedge against risk over the coming 12 months is gold. “Rapid global money supply growth raises the possibility of higher-than-expected global inflation down the line. We expect that gold will prove an effective hedge should this play out, while also providing a hedge against a possible increase in SA-specific risk,” he says.

He notes that Eskom is forecasting SA electricity demand to get back in line with last year’s level in two months’ time. “We therefore don’t expect to be out of the loadshedding woods until August next year at least.”

Business confidence, meanwhile, is at the lowest level ever recorded. “Wage growth has been in line with inflation for two years and we expect will come in below inflation, for at least six months. Real wage growth is strongly correlated with SA Inc equity performance.

"The key leading indicator for real wage growth is business confidence. It is therefore going to take some time before we get excited about SA Inc shares, despite their attractive valuation,” he concludes.

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