It looks like 2022 will be another year of unrest and resilience

By George Herman, Citadel Chief Investment Officer

Many South Africans are understandably concerned about what the future may hold for their investments. As wealth management specialists, we look at the world through wide and long lenses – and as such we are guided by ideas and strategy, rather than emotions.

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THE INVESTMENT CLIMATE

Global growth is slowing somewhat and consumer spending is under pressure from rising energy costs. However, unemployment around the world is at very low levels, which is good news for the longer-term global economic recovery. South Africa is the only exception in this respect, with its record high unemployment rates, but the local economy is boosted by low interest rates and record commodity prices. Globally, new business relationships are forming as supply chains are reorganized, creating new opportunities.

THE FIVE FACTORS DEFINING THE WORLD OF INVESTMENT IN 2022

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1. VOLATILE GEOPOLITICS

The protracted war between Russia and Ukraine affects millions of human lives and post-pandemic global political-economic stabilization. The volatility of the situation affects a multitude of asset classes, however, it is not an outright disaster for global markets. Geopolitical risks are a constant concern. What we see as side effects of the war is that Europe has not been so united for a long time, necessity drives ingenuity, innovation and reorganization of old systems, and volatility creates investment opportunities if you know where to look. The global effects of the war, however, will be felt via commodity prices and changes in trade partnerships and supply chains. Massive shortages due to intensified sanctions against Russia will cause significant inflation and affect central bank decisions. It is clear that interest rates will rise rapidly and that monetary conditions will tighten further this year. That said, we do not expect a global recession in the next 12 months, as US consumer balance sheets are very strong and not directly affected by the war.

2. THE DECREASING PANDEMIC

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The possibility of new variants and setbacks always exists; however, it appears that we are lagging behind the impact of the pandemic on global growth momentum. As the pandemic picks up and economies have opened up, consumers are unleashing that pent-up demand for goods that is supporting growth, especially in the United States. Europe is expected to suffer more from the war and China is cracking down hard on mobility to contain the spread of Covid-19.

3.INFLATION

The war and subsequent sanctions against Russia wreaked havoc on global commodity markets as Russian supplies became instantly unavailable. There are now supply gaps for a wide variety of commodities and new supply arrangements and logistics channels need to be established. This takes time, and as a result, the prices of many commodities have skyrocketed, causing an immense inflationary impulse. Inflation rose rapidly in many sectors and affected countries around the world, from food to oil. For context, the United States is experiencing the highest inflation rates in over 40 years.

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4. ACTIONS/REACTIONS OF THE CENTRAL BANK

With South Africa experiencing a relatively weak inflationary impulse, global central banks are under enormous pressure to act decisively. We will see interest rate hikes as well as a rollback of other monetary stimulus, which will contribute to a tighter global monetary environment. This impacts asset valuations, growth expectations, exchange rates and volatility as markets adjust. The risk is that central banks overdo the tightening and therefore stifle economic growth. Central banks are also engaged in a global race to launch central bank digital currencies (CBDCs) – a phenomenon we are seeing around the world, from major economies to island nations.

5. ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) PRIORITIZATION

I believe that building greener economies is not only vital for the survival of our species, but also beneficial for the creation of new industries, jobs, innovation, and near-term export opportunities. The commodity boom that South Africa is experiencing, especially in platinum group metals (PGMs) used in green technologies, is boosting our economy. PGMs currently contribute around 50% of South Africa’s resource basket and will likely increase as more green industries emerge globally, requiring the metals and minerals we produce. On the other hand, decarbonization has major implications for carbon-intensive developing countries like South Africa. Either way, green and socially responsible investing will boom in the next couple of years.

LOCAL IMAGE AND MAKING SOUND INVESTMENT DECISIONS

South Africa faces challenges. Abstaining twice in recent votes on Russia at the United Nations will affect our global position. We also have a host of socio-economic and corruption issues that need to be addressed. That said, taking all your money overseas because you’re worried about South Africa isn’t an investment strategy, it’s an emotional gamble that probably ignores all the facts.

We cannot be swayed by emotions such as optimism or pessimism. Citadel specializes in crafting investment mandates tailored to each client’s lifestyle and ensuring that their liabilities are backed by appropriate assets.

A key part of Citadel’s strategy is to build intergenerational financial security, and this is based on strategies that can weather pandemics, recessions, stock market crashes and more. Our investment team adheres to an investment philosophy that is based on four pillars that allow us to weather periods of volatility:

1. The future is uncertain and will surprise,

2. Asset allocation determines long-term investment results,

3. Evaluation is crucial and

4. Manage all risks at all times.

GLOBAL OPPORTUNITIES

Diversification is another way to reduce investment volatility. As such, Citadel is launching three new global multi-asset funds through our Guernsey business in April 2022. These funds are comparable to the classifications we are familiar with in the South African multi-asset space, with low capital options, medium capital and high capital available. for private clients and our global pension fund clients. These funds focus on active asset allocation (i.e. changing the mix of cash, bonds, credit, stocks and commodities), while passive ETFs will be used to gain exposure to different global asset classes. These funds are also cheaper than the average price of the peer groups they belong to.

OUR PROSPECTS

Despite the challenges, we are optimistic that 2022 will be a rebound year, but life and markets are uncertain and cyclical, so the focus is on creating financial freedom within these constraints. People who have worked hard to build their heritage want the freedom to choose their own path. Just as an aircraft is built to withstand turbulence and a ship is built to withstand storms, so is our approach to private client wealth management. It is designed to withstand volatility and bring the client to the end goal.

George Herman is Citadel’s Chief Investment Officer

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