The Professional Edition 6 July 2022 | Page 14

Investors not expecting high inflation to stick
Inflation relative to average since 2000
10 %
5 %
0 %
-5%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Advanced economies
South Afrrica
2021
2022
2023
2024
2025
2026
2027
Source : IMF
Consequently , while the market is preoccupied with the latest ( high ) inflation number , the critical decision is not so much the speed that inflation reverts to its trend ( although this is clearly an immediate and pressing concern ), but rather whether the trend for inflation over the next couple of decades will be similar or structurally higher than it was in the past .
Given that markets are not expecting long-term structurally higher inflation , PPS Investments ’ s portfolios tend to have a strategic allocation to inflation-linked bonds as they will offer some protection should inflation be closer to the 5 % it averaged for advanced economies ( and more than 10 % for South Africa ) in the 20 years preceding 2000 .
At the same time , we have started building up a higher cash position given the market is not anticipating that real interest rates could be materially higher than in the recent past , with muted interest rate expectations more than 12 months out .
While the prospect of an economic recession will undoubtedly have an impact on asset prices in the short term , the more important question for the next decade ( or two ) is whether the global economy will continue to grow at its historical trend growth of 3.5 % per annum through its transition to a greener economy . The question is also whether the South African economy will remain structurally stuck in an underwhelming 1 % per annum growth rate for the foreseeable future .
Our portfolios have an overweight to South African assets as we believe we are receiving sufficient compensation for taking on the risk of mediocre economic growth , given the market is not expecting that South Africa will be able to implement the reforms to change its growth trajectory in a positive direction .
At the same time – and partly to diversify this South Africanspecific risk – we have a longterm preference for ( global ) asset managers who can include a growth focus given our view that such managers are more likely to identify companies that will benefit from the global transition to a less carbon-intensive global economy , while also favouring strategies that are flexible enough to include value opportunities should it make sense .
In short , it is tempting to get swayed by the short-term noise around economic variables and try to anticipate their next direction . However , it is incredibly difficult to time investment cycles and we think it is often more useful to look a bit further out rather than try to time shortterm moves .
Our portfolios try to look through short-term volatility , to appropriately benefit from longer-term trends , while remaining well-diversified to limit short-term volatility .
* Read Linda Sherlock , Executive : Wealth & Business Development at PPS Advisory Services and Enablement ’ s article ‘ Mixing and matching ’ – doing it right amid market turmoil on page 19 .
Click here and visit our website to learn more about PPS Investments .
David Crosoer
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