mm hmm. Hi everyone. My name is Ryan Muthoni. I'm an analyst on the abscess Select equity fund And I'm glad you decided to join me this morning. Um in this review of the markets in 2021. And also to consider the ideas that we have for 2022, we think there's probably five key questions that you'd like answered at this stage at this stage of the year. First of all, I think you'd like to know how markets did over 20 2021 second looking forward. Once you've, once you've covered the basis on history looking forward, you'd want to know has the pandemic, has has the pandemic been fully priced in, has the market moved on from it? Third, inflation has become a very topical issue. Um and I'm sure you'd like to know what we think about the outlook for inflation and how that will impact the outlook for equities and your portfolio in particular. China is also a very important thing. Remember china drives commodity driven economies such as South Africa. And I think the biggest question for us is is there still value in essay equities. And if so, what are some of the investing ideas for the coming year arising from essay equities without much further delay? Maybe let's get into the detail now. So starting with markets performance over 2021 Markets did really well. Um and but for 2021, I think you have to divide it into two, first, the first six months and then the second, six months in the first six months, you saw a significant rally for for este markets and in fact during that time, essay markets measured in dollar terms. Outperformed even in the S&P. There was the research that came in june when talk of tapering began. Um and a significant selloff happened since then. And then you saw in november december, the market started to recover a little bit, but it didn't quite capture, recapture the highs that you saw earlier on. And this is when measured in dollars. But some, a few interesting observations come from there. After underperforming the MSC I E. M for the last 10 to 15 years, essay finally had performed in 2021 returning about 12% in dollars versus the AMS approximately 3%. Just remember am underperformed largely because of the significant contribution of china which went significantly backwards over the course of the year. But like we said, after the july unrest, M. S. C. I. S. A. Started to underperform and it lost steam over the violence of the year. Some of the key drivers of the performance of the Jsc was the performance of S. A. Inc stocks. That is basically domestic driven stocks and small caps. We saw the influence of Naspers and resources fading in the second half at the beginning of the year. Naspers was really strong. Um And so we're resources, but after stock of tapering started, this also coincided with increased regulatory pressure in china and that pushed down both Naspers and resources. But like I said, S. A inc outperformed S.A. by about 34% on a year to date basis. And small caps outperformed large caps as well on the year to date basis. So if we put, if we put the micro together, we saw essay equities losing ground later on in the year and the rand as well after performing particularly strong, particularly strongly in the first half of the year, we saw the rand begin to weaken post june and this weakening accelerated in november december. So in line with the rest of the GM complex, the Rand lost ground over the year. It is currently tracking about 8% down relative to the dollar year to date. If I was to break down those performance numbers, it's quite clear from a commodity perspective. Cole was a significant outperformer at the beginning of the year, it was the P G. M. S. Precious metals, but these sold off significantly when june july came in and at the end of the year, they ended up actually recording negative returns, but cole Brent um and and and and the lME metals index were positive for the year. From an equity perspective, when you look at it from an industry group perspective, telecoms were big, both MT TN and telecom did incredibly well. Health care particularly led by aspen and then financials and consumer services performed particularly well, I think the most notable thing here was that Naspers and process like significantly and produce the only negative sector returns. Breaking it down into stocks. Individual stocks, you can see that industrials were the best performers with MTN Spence cecil and so focused on gaming, which particularly rallied when, when, when we came down to level one restrictions as well as distill on the back of the takeover offer, March is an imperial Pepco cap and Tequila were the best performing stocks on the worst performing side. You can see that list all is all about gold and precious metals predominantly the rent is always topical and for the first half of the year it was very well supported. We saw terms of trade looking incredibly positive. Um and bond yields are also quite supportive. But again, after june terms of trade started rolling over and this rolling over only accelerated towards the end of the year. Um, bond yields have remained high, they remained at elevated levels, but this hasn't been enough to, to encourage the right to remain strong. And the reason why is if you look at this chart, what you're seeing is that there's an increasing risk premium being loaded onto the rand and that's what's driving the high bond yields. So whichever, whichever time horizon you look at whether it is average since 2017, 18, 19 or 20. What you're seeing is that the currency risk premium is rising and that's been pressed into the, into the bond market and that's why we're seeing on the 10 year bond that that the S. A. G. B. Is trading in that 10% yield level. As a result, you've seen the rand losing ground against both the usd and the euro this year. From an investment perspective, I think it's quite clear that that institution and foreign interest remains quite muted. We've seen that S. A has been hit harder by outflows than P. R. E. M. And I guess that's a reflection of that risk premium that we were speaking about, foreigners have remained net sellers on the J. C. And this has been there for a long time, which has also driven down net foreign ownership levels. What is also interesting is that essay institutional equity weightings have remained low as well. Institutions are preferred to play the bond market or increase their offshore allocation for in vain. What little there has been has been limited to only a few stocks and you've seen that in the in the level of activity there. So, Mtn Mr Price and Pepco have been of greatest interest to foreigners. So looking at moving away from markets and starting to look at the global macro picture, how has it evolved over 2021? And I think one thing that's very clear is that global GDP looks to have recovered from the pandemic and in fact right now, when you look at global aggregates where probably at GDP levels ahead of where it was pre pandemic. Clearly the impact of the significant monetary and fiscal stimulus has come through. In GDP in supporting GDP growth. However, this growth impulse appears to be moderating low. It appears to be moderating and coming lower. We've seen the commodity boom waning and global growth appears to have peaked. It's still higher than 2019 but the absolute growth rate seems to have picked and is expected to come off over the next couple of years. The key driver of this of this slowdown is the transition to monetary tightening and we've seen it across the board in D. M. S. And in E. M. S as well. And it's quite clear to us that up is the only direction for rates from here. It may it may take a little bit longer or it may be accelerated but it's quite clear that rates bottomed out during the pandemic and from here on that it's going to be increases in rates rather than rate cuts that that we've seen up until now we thought that essay was late in the game. But looking at what's happened with the omicron virus, um the omicron variant, it's quite clear that maybe caution is warranted but we understand that what we're looking at is just a longer time towards policy normalization and I guess that's an that's an interesting way to get into a discussion about the pandemic and what impact it's had on markets, this is a debatable point but it's quite clear if you if you look at the trend line from where we were last year to where we are right now, is that the pandemic is by and large being brought under control. We're seeing vaccination in most developed countries, progressing well. It's not progressing that well in developing countries for a whole variety of reasons. But vaccine makers are now on track to produce over 10 billion doses in 2021. And even more than that next year, they're getting their act together with regards to manufacturing capacity and manufacturing ability and what we were seeing before the development or the discovery of the ο variant was that the rate of growth of infections looked to be on the wing. It seemed that we had a clear path out of the pandemic. What we actually saw was that the reopening of economies have, was happening at variable rates previously. I think the impression most people had was that we'd either have the pandemic and the virus or it would go away and we'll go back to normal. What's become clear to us now is that economies are going to open at variable rates. What we're going to see is that different levels of restrictions will be imposed in different countries, which is going to influence what the level of economic activity are, is in those individual countries and big things like the risk of new violence remains real. This is what was driving the ebbs and flows of the infection cycle. So in our view, for as long as vaccination rates remain low, New virus will continue to emerge. The world will remain on this seemingly unending cycle of reopening and closing down eventually. This this virus will become harmless and we will go back to some semblance of normal, it's very difficult to place to to put put your finger down on whether it's in 12 months, 18 months or 24 months. What is clear is that it's going to be, it's going to be at different speeds, different rates for different regions inflation is the other big discussion that we've had that that that the markets, the markets are looking at. And I think it's quite interesting to look at it from a very fundamental perspective, the question that we've had is is inflation transient or structural? That is is it just going to be here for a short period of time or are we seeing a structural on aggregate increase in the level of prices that is going to persevere over the medium term? I think it's important to think about what the true definition of inflation is following a year of extraordinary fiscal and monetary accommodation to reflect global economies. Remember we had a complete stop in the economies the government needed to put in stimulus to get the supply side started so that the demand side could get going after all activity had been put to a stop. So it is natural to expect that rising prices following such a such a supply and demand stop is almost inevitable. The basic facts and the impact of this stimulus guarantee this. I mean the stimuli was much bigger than it was even at the time of the GFC lessons from history. Prior to the GFC. Global inflation had been subdued for a very long time, driven largely by those structural forces that we all know about. Technology. Um slow population growth, increased productivity. Okay. But the recovery from this GFC was driven by a significant injection of liquidity, low interest rates. And this was expected to drive high inflation. But this never really happened. And I guess the biggest question is is this time any different If you consider the extraordinary liquidity introduced this time over $10 trillion the substantially higher fiscal deficits, the growing supply constraints and then vaccine rollout programs which all have to be paid for coupled with higher savings. Surely the past pandemic world starts. The post pandemic world should start seeing very high inflation sooner rather than later. I guess one of the points to consider is is there really a global inflation cycle? If you think about it? The globe became synchronized during the time of total lockdown? That was in April two probably May June last year. And it would be natural to imagine that the whole globe started up again. But like we said when we were speaking about the pandemic um and and the various viruses and the vaccination process and everything. It's not been a synchronized startup. So it's actually logical to believe that the flow of inflation is going to come in, it's going to appear in different ways for different countries compounding that is the fact that there are various drivers of inflation which are relevant in different ways. So first of all oil price, food inflation, commodity prices and the level of the U. S. Of the US dollar are the basis for where inflation comes from. Remember that food oil and metal prices already well up over pandemic levels and the dollar is also incredibly strong. What you find is that developed markets seem to have similar inflation experiences that that revolve around these four clusters but are primarily around the oil price. While emerging markets tend to be individually unique depending on whether there are fuel importers, exporters, agrarian subsistence or commodity based economies. We therefore think that once a synchronized pandemic effects that is the basis upon which the reopening is happening. Once these effects have dissipated, inflation trends will increasingly diverge, opening the door for greater policy divergence as well. So as an example is we've seen as a climber form higher interest rates globally has risen in South africa. We haven't seen that big jump in inflation despite us being well exposed to food to rising food inflation. Just showing that we have unique circumstances here that maybe are not relevant to the rest of the world only relevant to commodity exporting countries that have a higher inflation that have a high unemployment rate such as ours. Yeah. What you've seen when you look in aggregate the rising inflation transients transients and its oil-driven Jay Powell made it a very clear point that when you speak about transient, um it's all about how you define the time, the time period, transient could be, could be considered to be very short term. But what is short term is it six months is at the end of 2021, at the end of 2022, what is clear to us is oil prices rose quite aggressively and they've started coming off right now we still have supply side issues particularly around production. The fact that there's not been much Capex and that because of the differing opening and closing of various economies, we still can't get goods from one place to another which is raised which which is given putting pressure on prices. The chip shortage being a particularly good example. So I guess the question is what's common to all of these, all of these economies. It's this global search in liquidity because remember always an everywhere inflation is a monetary phenomenon. The basic definition of inflation is that it's too much money chasing too few goods. It would therefore be reasonable to ask, where are we going to see the impact of this global surge in inflation. The important thing here is that you have to watch for whether this increase in liquidity pushes demand beyond supply for sustainable period of time and whether the monetary growth is matched by an improvement in spending or loan growth, that's not quite, that's not actually something that we've seen, which is what reemphasizes our view That while while inflation may not be entirely structural, it will be transient but transient is not 6 to 12 months, it maybe 12 months to 24. So I think overall expect emerging market inflation to outpace developed markets, inflation, inflation trends over time, particularly because of persistently higher food and oil prices. And in summary, I think what we can say is that it's very clear that inflation is rising, it's important to keep a watch over the short to medium term and this rising inflation has driven the call for raising, raising interest rates and and reduction in in in fiscal stimulus. China is a big consideration, especially for countries such as South Africa that are commodity exports. And so it's important to understand on what basis they demand commodities and where the growth has come from. I think it's quite clear that the commodity story in China has always been primarily a property driven story. Property was a key growth engine for China in a large part of China's credit cycles. If you consider that property is about 25% of total fixed asset investment. It's quite clear that any slowdown in property will weigh on commodity imports. What you've seen is that both GDP and fixed investment forecasts are focused too slow by the M. F. On the back of the slowdown in property. Um And if you think about it when when property slows down, you'll see the impact on infant related industrial output impacting as well industries that are related there such as metals and mining. And I think more important to us commodity producers and economies that are exposed to china. So south Africa exports commodities to china. So if property slows down demand for commodities declines and that has a negative impact on our GDP growth rate. So in summary, the chinese recovery remains a significant concern. Um It's credit impulses clearly declining. This is driving a sustained deceleration in china's business cycle and as we said, it's negatively impacting commodity demand and ultimately commodity prices. What I think could be seen as a sign of comfort is that recent triple A rate cut signals china's readiness to respond. We do not think that the authorities in china will sit back and watch this significant slowdown coming to mess up with their with their plans with along with their long lived plans. Um And with growth in the, in in the economy We think credit growth and investment will react positively, but this comes with a lag. So in all likelihood, see them responding over the next 6 to 12 months, but slowly. What I think is quite clear is that this is not a supercycle yet again. So a rebound in the credit impulse which we're already seeing slowly coming back and re leveraging will help keep growing keep growth going. So in summary we have a moderate outlook for growth and by moderate it just means that the acceleration is declining. We're still global growth is still ahead of where it towards pre pandemic. The fiscal stimulus out there is still significant. The level of liquidity is massive and even though tapering has begun um we we don't we don't see growth collapsing. There are however risks that are emerging. These are risks such as the emergence of vaccine resistant covid variants and the whole story around the omicron variant illustrates this point quite solidly. We're seeing higher real bond yields emerging in the US and this drives stronger dollar. When the dollar is strong, then it drives capital flows away from E. M. S. And I think the biggest risk is if if china slows more than expected or if the authorities in china are willing to tolerate a much slower growth rate than than than we expect. This will have a more significant impact on commodity prices, commodity volumes and emerging markets, particularly those that depend on on china as big significant trade partners of which South Africa is one. Having looked at all of this micro I guess the final question is is there value in essay equities? Looking historically essay equities have always been underappreciated by foreigners. When we when we aggregate E. M. Flows relative to size, we've always got less than we deserve relative to our size. We've seen our average waiting relative to the MSC. A benchmark generally tending to be an underweight, maybe less of an underweight when we've done well, but more of an underweight when we're struggling. And cumulatively, what you've seen is net foreign transactions on the jsc have declined over time and this is a multi year trend that we've observed. But I think what is even more interesting is that local institutions have preferred the bond market than rather than the equity market and have reduced the equity weightings. The local equity weightings in favor of both bond market and international and and and international um international portfolio investment. All of this has served to take money out of the domestic market. And this is one of the reasons why the market has seemed so cheap. And these charts just show you whether it is in absolute terms or relative to developed markets or emerging markets essay remains cheap. And this cheapness is interesting when you consider that returns in the last year were primarily driven by earnings because earnings is the commodity that is bought and sold in equity markets when earnings are growing and especially when they're growing ahead of expectations as they were last year. You would expect to see a re rating what we actually saw was a 48% de rating these stocks are incredibly unpopular, but that does not take away from where value is. We expect this earnings growth to tail off in 2022, that's for sure. Resources in particular seem to have peaked in terms of earnings growth in the last one year and over the next year should actually see earnings going down nick, teens, industrials and financials will go will continue to grow earnings, but at a slower rate. But despite this, we continue to see significant value and that significant value will underpin the equity market revival, which we begin, which we believe is already underway. Therefore, when we speak about the domestic s a story, we think this rally is sustainable. From a pure macro perspective, we completely acknowledge it is more downside than anything else. We agree that s has been in structural decline for more than a decade. We think there's very little confidence in the reforms coming through. We see the rising risk, whether it is with regards to the debt criteria, or structural reform, but we believe most of those has been, most of that has been factored into market prices. We think the COVID-19 pandemic has sped up and laid bare S.A. flaws, but again, most of this is in the price, this is why it seems so cheap. We definitely do need business confidence to improve for private sector complex recovery, But see a broad recovery into 2020 to to levels well ahead of where they were in 2021, when you look at where managers where where where the investment managers are are positioned with regards to equities. It's quite clear that there's, there's some significant biases, managers are definitely significantly over which on the mining side, general retailers, tobacco, fixed telecom, general financials and chemicals, which is basically cecil beverages and paper and they're still they're quite underweight When we speak about mobile telecoms, real estate, food retailers, life insurance, personal goods and a couple of others which in our mind shows that there is opportunity within this market and I guess the end the final part of our presentation today is trying trying to review what ideas you could possibly be considering over the next year or so. And to consider before we consider the ideas, I think it's important to see where what are thinking has changed at the beginning of the year. We were quite bullish and quite positive. We thought the sustained recovery and increased risk, consented mint as the pandemic wing would carry the economy and the markets with them and we get a lot of foreign influence and the market would redirect But now we see that the start stop nature of this reopening process is going to is going to is going to delay this recovery. We think we think the supportive commodity prices, stable currency and low inflation will however, we will will will continue and this is actually positive for domestic stocks and resources. Um but going into this coming year, what what what what we figured out is that we are bullish stance on resources needs to be very nuanced. We've gone underweight resources, we still like platinums, but we think that at this point in the cycle, you should be neutral to underweight the diversified, the diversified miners. We continue to think S. A inc offers value stock picking becomes incredibly important here. Um We we think the opportunities abound, but it's very important to stop picking if we're to look at it from a from a sector perspective, we think non resource land hedges have liked quite significantly and and looking at the stock's there, we think british american tobacco continues to offer attractive valuation, solid dividend yield will be low disappointment risk. Richmond has rallied really hard, but Richmond offers you exposure to growth in the middle class in china not necessarily affected by the common prosperity policies that are coming in there. Um but it gives you exposure to that emerging market as well as developed markets as they reopen. The only thing to remember is Richmond is if developed market bond yields continue to rise or go beyond that 1.6, it's very likely that these bond proxies will be sold off. We think general retailers are broadly rallied and they look full. Um and prefer banks to these general retailers, we think banks give you solid exposure to the domestic economy and we think they're very well provisioned and we think that over the next one or two years when they start paying back dividends, when you start paying dividends to shareholders, you will get your return both in terms of growth in network and higher dividends. Like we mentioned previously, we should actually be stuck picking the mining diversified stocks. They don't look expensive, but this, the reason why is that they look, is that is that they're pricing in earnings going backwards. But that said, when you look at them from a pure fundamental perspective, his returns are still high. Cash flows are quite strong and dividend yields are quite high. Um And if we were to pick one in that in that sector would like anglo american because it gives you solid platinum exposure and or diamonds well diversified with a very clean and solid balance sheet. We continue to like be G. M. Stocks, they may be well off their highs, but we think that over the short to medium term the deficits, the deficit situation will come through again, we don't see significant investment coming to cause significant over capacity in terms of production, so prices should improve and this should be seen should this should be reflected in the earnings from an industrial perspective, we continue to think the telcos offer value both because of where, because of current levels of valuations, but as well, we think all three stocks Telkom, MtN and Vodacom have a very compelling self self help story, Telkom from trying to look for value in terms of unbundling. It's it's open service business and also it's it's it's it's other other components of its business as well. MtN from its de leveraging its disposal of businesses that that that are non core and and focusing on the african continent and and Vodacom from its investment in fiber growing data, in growing growing data investment and as well, it's new investment in Egypt should allow these three companies to continue to grow earnings over the next, over the next 12 months, over the next 12 to 24 months, nice person process are still some of the biggest stocks and I think the way to think about this is that their fortunes are tied to. Tencent Management has gone a long way in terms of trying to divert investors focus from the actual from from this this connection to tencent to the rest of the portfolio. But as you can see, the correlation remains quite high. The big risk here is that this significant regulatory uncertainty for 10cent particularly around this common prosperity policy. Their dominance and the need for the Chinese government to regulate access to games um and reduce pressure parents and students that particularly when it comes to online online activity. This regulator uncertainty is not going away and this is weighing on the valuation despite the underlying growth rates. So finally if I went back to our initial question the five key questions for your portfolio manager this year that that we think you should ask your portfolio manager this year. How would we answer them? So I guess the first one was how did markets do over 2021? We think there was solid gains significant out performance. We've seen all time highs on the J. C. But slowing momentum the J. C. did not perform emerging markets but momentum has started to slow. From the perspective of the pandemic. Know the market has not moved on from the pandemic and you keep seeing shocks as new news comes out whether it is a new variant, whether it is increased closures in various parts of the economy or even when travel restrictions are put in place. So we're saying that markets are still prone to shocks but it's quite clear that as time passes the pandemic becomes less and will become less and less of an issue and eventually it will become harmless and we'll be able to open up and continued life whether it is life as we knew it or a new normal that's still that's still something to be told inflation is inflation here to stay. Will it help or hurt my portfolio. What we think is that inflation is here it is here to stay over the short term, it is likely that wage inflation will remain sticky on the upside and that will hurt company margins. But to address inflation, the thing to do is to pick stocks that have enduring pricing power and cheap valuations. These are perfect hedge for inflationary pressures over time. How important is the outlook for china? It's significant. China china is the ultimate influencer for South African stocks for for South African investor. It's very important. I think the outlook right now is neutral to benign, it's not negative, commodity prices have slowed, the property market has slowed there. It is unlikely that you can stimulate it, that the property market becomes another big driver of GDP growth in china. But we think that the credit impulse will come back not to any great extent, but enough to ensure that you're still growing in the mid single digits. The economy is still growing in the mid single digits which should allow for reasonable demand for commodities from countries such as South Africa, is there value in South African equities? We definitely think so. We think if you have a defensive patient approach, um you will win. We favor midcap industrials, we like the telcos. We like the banks like healthcare and in mining. We like the platinum stocks. I hope this presentation will help you make your decisions over the coming year. Um and I wish you all the best for the festive season and the new year. Thank you mm hmm