IE popup

To enhance your experience of our website, we recommend that you use Edge, Chrome or Firefox, as your current web browser is out of date.


Citation - Fourth Quarter 2022



Investment Strategist and Portfolio Manager
Estimated reading time: 4 minutes 24 seconds

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 based on a three-year view, which is expressed as macro-economic and market assumptions, including economic growth, inflation, interest rates, price-earnings (PE) multiples, and credit spreads, to list a few. Based on these assumptions, our asset valuation models produce expected returns for various asset classes. This section is used to summarise our High Conviction view and the resulting asset signals.

Central banks have rapidly hiked interest rates into restrictive territory to bring inflation back under control. Inflationary pressures are easing, and we are approaching the end of the rate hiking cycle. Global economic growth is weakening, and recessionary indicators are flashing red. The extent of the economic downturn in 2023/24 remains highly uncertain. As such, when it comes to investing, we are considering a range of potential economic outcomes, with multiple scenarios feeding into our asset allocation process.

Our High Conviction scenario assumes that global economic growth will be below capacity over the next two years, with weak growth across developed markets, however, emerging markets will experience better growth, due to China’s expected rebound. Below capacity growth and slowing inflation translates into weak company earnings growth. Our projected earnings growth numbers are below consensus, which have remained strong. Valuations (trailing PE ratios) are reasonably attractive compared to long-term historical averages but are not compensating for the risk to earnings. Global equity is rated neutral overall, with developed markets’ expected returns below neutral and emerging markets (EM) rated above neutral.

United States (US) fixed income is rated neutral overall. Enhanced cash is attractive given the rate hikes. Bond yields are above our assumed exit yields. Investment grade credit spreads are above long-term fair value assumptions, but spreads can widen further as company earnings come under pressure.

South African (SA) capacity growth is impaired by structural issues, and we assume economic growth roughly in line with capacity. JSE-listed companies’ earnings are well above trend and no further growth is projected over three years. SA equity is attractive from a valuation perspective, but factoring in the weak earnings outlook, has a neutral rating. Local interest rates are assumed to continue moving in line with the global interest rate cycle. We assume a very steep yield curve, and high real long-term bond yields in recognition of SA’s fiscal and structural challenges. Expected returns from SA enhanced cash and bonds are attractive and have above neutral ratings.

The investment horizon is crucial. Reduced liquidity and increased recession risk are likely to continue, causing weakness and volatility across markets in the near-term. See the table below for a summary of our Asset Class Valuation Signals based on three-year High Conviction scenario.

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