Investors should be cautious when investing offshore in 2022 given the current expensive valuations of both global equities and global bonds compared to South African equities and nominal bonds. Although these assets are particularly popular right now, some careful consideration should be given when building a portfolio.
Speaking at a recent client seminar, Sandile Malinga, Multi-Asset Portfolio Manager at M&G Investments, said US equities are particularly pricey when considering the lower real yield and forward earnings yield offered by the Nasdaq and S&P 500 indices versus other equity markets.
“Japanese and most European equities are also relatively expensive, but South African equities are cheap. Despite the strong returns delivered by the JSE All Share Index in 2021, the local market lagged behind many others during the recovery and continues to do so – share price increases have not kept pace with company earnings improvements.”
According to Malinga, today the JSE is still trading at attractive valuations (as measured by price/book value and price/earnings ratios) compared to its history and to those of developed markets. M&G Investments believes investors are pricing in an overly pessimistic view and there are still good opportunities for strong returns from the local market going forward.
The group has a similarly negative view on developed market government bonds. “Although many central banks have started hiking interest rates in view of the economic recovery taking place, the exceptionally low-to-negative real bond yields off which they started to rise means that, in our view, it will take time before they will be attractive enough for investors to consider investing in, especially compared to South African and other emerging market government bonds,” said Malinga. “The SA 20-year bond started 2022 with a nominal yield near 10%, still close to its highest level since 2001. We believe this offers investors ample reward for the risks involved, with a cushion for inflation above the SARB’s target, for example.”
As a third factor to consider, he said, the rand had depreciated 9.1% against the US dollar in 2021, and M&G Investments estimated that the currency (at around R15.5/US$) was now trading on the cheaper side of fair value. This meant that offshore investments might not benefit as much from further depreciation in 2022.
“All three of these factors should give investors reason to be cautious about adding developed market assets to their portfolios in the year ahead,” Malinga concluded. “Although diversification is always an important consideration, choosing expensive investments now could lead to suboptimal returns over the medium term, when local assets could prove to be more rewarding.”
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