‘In the current environment, you must have the ability to change very quickly when the macro environment changes,’ said Lacock, who co-manages the Fairtree Balanced Prescient Fund.
He added that while there are a range of risks that warrant a more defensive stance, managers can’t ignore the opportunities.
‘What stands out when we look at the economic picture is that despite the very aggressive way the US Fed has raised rates over the last 18 months to two years, the economy has remained resilient,’ Lacock said. ‘Because of that, the market seems to now believe that there won’t be a recession.
‘But we still think a US recession is coming. Some of the factors that have supported the economy like excess savings and government spending will start to fade in the next few quarters, so we think it has become important and prudent to take a more defensive stance in our portfolios.’
At the same time, however, he believes there is reason to be more optimistic about the picture in emerging markets led by China.
‘We have seen a disappointing reopening and recovery from China in the first half of the year, but we think that China will surprise markets positively relative to the very low expectations,’ Lacock said. ‘When we look at the data, our own analysis suggests that the economy is stronger than what the headlines suggest.
‘That means that those economies that are linked to China from a consumer, trade or commodity perspective may do better. That includes South Africa.’
A second positive for emerging markets is that there is scope for central banks to start cutting interest rates in many countries, which will stimulate their economies.
‘The inflation problem that we’ve had over the last 18 months to two years is mostly a developed market phenomenon,’ Lacock pointed out. ‘If you take South Africa as an example, our inflation is back in the middle of the target range, while in the US it is twice their target.
‘So I think emerging markets are in a position to cut earlier and deeper. We’ve already seen this in some South American countries like Brazil.’
Thirdly, valuations on both shares and bonds are much more attractive in emerging markets, with South Africa being a good example.
‘Valuations are a bad timing indicator because you do need something to happen to unlock that value. But we do see a few potential catalysts in South Africa.
‘There is the potential for rate cuts in the first half of next year, there are also reasons to expect a much-improved electricity supply outlook, and lastly next year’s election will keep pressure on government to enact economic reforms but maintaining political stability.’
Overall, Fairtree therefore remains cautiously positioned given the risks of slower global growth and increased geo-political tensions. The portfolio is overweight South African and global fixed income, and overweight commodities.
However, the portfolio holds a neutral cash position, and is still willing to invest where it sees the potential to earn good returns.
‘What is different to some of our peers is that we are taking something of a “barbell” approach,’ Lacock said. ‘While we have become more defensive in being underweight global equities, we are also more offensive in the opportunities we are seeing elsewhere. We’ve just started to increase our position towards SA Inc. as well as towards emerging markets.
‘We are also investing only in the most liquid parts of the market, where changes can be made quickly. I think that is key to any portfolio at this stage.’
By Patrick Cains
Fairtree Asset Management (Pty) Ltd is an authorised financial services provider (FSP 25917). Collective Investment Schemes in Securities (CIS) should be considered as medium to long-term investments. The value may go up as well as down and past performance is not necessarily a guide to future performance. CISs are traded at the ruling price and can engage in scrip lending and borrowing. A schedule of fees, charges and maximum commissions is available on request from the Manager. A CIS may be closed to new investors in order for it to be managed more efficiently in accordance with its mandate. Performance has been calculated using net NAV to NAV numbers with income reinvested. The performance for each period shown reflects the return for investors who have been fully invested for that period. Individual investor performance may differ as a result of initial fees, the actual investment date, the date of reinvestments and dividend withholding tax. Full performance calculations are available from the manager on request. There is no guarantee in respect of capital or returns in a portfolio. Prescient Management Company (RF) (Pty) Ltd is registered and approved under the Collective Investment Schemes Control Act (No.45 of 2002). For any additional information such as fund prices, fees, brochures, minimum disclosure documents and application forms please go to www.fairtree.com
Highest rolling one-year return 57.79% (Benchmark 30.56%) and lowest rolling one-year return -9.29% (Benchmark: -10.47%) information to 30 September 2023. The fund has returned an annualised return of 10.11% since inception (Benchmark: 6.65%). The fund’s annualised performance over 1-year is 14.66% (Benchmark: 13.01%). The fund’s annualised performance over 3-year is 11.96% (Benchmark: 10.36%). Fund returns disclosed are annualised returns net of investment management fees and performance fees. Annualised return is weighted average compound growth rate over the period measured. Fund investment risk indicator level: conservative. Full performance calculations are available from the manager on request. Annualised performance: Annualised performance shows longer term performance rescaled to a 1-year period. Annualised performance is the average return per year over the period. Actual annual figures are available to the investor on request. Highest & Lowest return: The highest and lowest returns for any 1 year over the period since inception have been shown. NAV: The net asset value represents the assets of a Fund less its liabilities.
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