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Citation - First Quarter 2022



Investment Strategist and Portfolio Manager
Estimated reading time: 2 minutes 42 seconds read

Scenario modelling has formed part of Citadel’s investment philosophy for two decades, and it enables us to better understand potential market outcomes and construct stronger portfolios. The Citadel Asset Management team has a core or “High Conviction” scenario three-year view, which is expressed as macro and market assumptions including economic growth, inflation, interest rates, price-earnings (PE) multiples, credit spreads, to list a few. Our asset valuation models produce expected returns for various asset classes, based on these assumptions. This section is used to summarise our High Conviction view and the resulting asset signals.

The impact of the Russia-Ukraine war on commodity prices, especially energy, has resulted in global inflation moving even higher and is likely to remain stickier than previously assumed. Central banks have commenced on an aggressive monetary tightening phase to bring inflation under control, using interest rate hikes and quantitative tightening. As a result, global economic growth is expected to moderate sharply during 2022. Europe is likely to be impacted more than the United States (US), China, and other parts of the world. The risk of a global economic recession has increased but remains below 50%. Central banks do not want to kill the economic expansion and are sensitised to signs of credit market stress and economic weakness. Our base case remains for inflation to moderate towards targets over our three-year horizon. Developed market 10-year bond yields are assumed to be in line with inflation three-years from now , meaning they will deliver 0% real yields.

The combination of tighter monetary policy and the commodity shock creates a less accommodative macro environment for equities in the near-term, but the three-year outlook remains constructive. Expected global equity returns are viewed as neutral, and in some regions above neutral, after recent selloffs. Market valuations (trailing PEs) are close to, or below, our assumed exit or fair value PE assumptions in most regions. Earnings are projected to grow at a slower, but still decent pace, underpinned by positive economic growth. The investment horizon is crucial, as geopolitical risks, quantitative tightening, and interest rate hikes are likely to cause volatility across all markets in the near-term.

The South African (SA) economy is assumed to grow at capacity. Johannesburg Stock Exchange (JSE)-listed companies’ earnings are well above trend and little further growth is projected over the next three years. The JSE is attractive from a valuation perspective. Interest rates are assumed to rise in response to the global tightening cycle and current inflationary pressures. We assume a very steep yield curve, and high real long-term bond yields in recognition of SA’s fiscal and structural challenges.

From a medium-term valuation perspective, and under our High Conviction scenario, SA equity has an above-neutral expected return outlook, while developed and emerging market equity is at neutral. Bond yields rose sharply, and US and global fixed income have become more attractive but expected returns remain below neutral. Domestic bonds have an above neutral valuation signal. SA cash moved to neutral, and US cash remain just below neutral. The overall, medium-term, signal is therefore equal weight equities, with an increase in allocations to fixed income and alternatives. See the table below for a summary of our Asset Class Valuation Signals.


Outlook shown reflects the signals from Citadel Asset Management’s asset valuation models and is based on each asset class’s 3-5 year expected return. The model’s expected return is compared to what investors historically expected from these asset classes. As example a Neutral Outlook will be roughly 1% real return for Cash, 3% for Bonds, 4% for Gold and 6% for Equity and Property. Note that no currency views are taken and currencies are assumed to change in line with inflation differentials for modelling purposes.