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SIMON BROWN: I’m chatting with Debra Slabber, portfolio specialist director at Morningstar SA. Debra, I appreciate the time again.

The most anticipated recession which was expected in the US for this year – we’re in the fourth quarter and it’s not here. It looks like it’s not coming. We’ve still got a hawkish Fed, but it’s not the horror that we had perhaps anticipated this time last year.

DEBRA SLABBER: Hi, Simon. Thank you so much for having me. You are spot on. Investors came into 2023 on a very high alert for a potential recession, and I would say if we are in a recession it’s a pretty strange one because there are lots of things going on.

On the one side you have the Fed that’s been absolutely relentless in trying to hike rates in an effort to try and slow down this economy, but we are seeing pockets of the US economy still remaining resilient.

If we look at travel numbers and other services sectors [these] remain strong. The consumer is still in pretty good shape, even though of late we are starting to see them dipping into savings. So I think it’s a pretty strange macro environment that we are finding ourselves in, and I think we sit with this high degree of uncertainty.

But don’t get me wrong. I do think that from a Morningstar global perspective we still do expect a recession at some point, whether it is earlier next year or later next year, but probably not as severe as the market initially anticipated.

SIMON BROWN: That uncertainty – particularly if we are a long-term investor, let’s forget the two or three or even five years – if we are looking out [with] a long-term view, uncertainty creates opportunity.

DEBRA SLABBER: Absolutely. It always does. For a long-term investor and for an active investor it’s quite an exciting time. So we would say we are cautiously optimistic, but we are very much aware of the shorter-term and medium-term risks that are present in the market at the moment.

But the market’s fundamentally different from what it was a couple of years ago if you think about opportunities in the fixed-income side, opportunities in the equity side. So for a long-term investor it’s still very much compelling to have time in the markets.

SIMON BROWN: As you mentioned, in US tech obviously, valuations are stretched, but from lots of others – you mentioned fixed-income bonds out there – we are getting some good returns for the first time, and certainly in developed markets for the first time in a long time.

DEBRA SLABBER: Absolutely. I mean for the first time since 2007 you’re actually getting a real return out of a real yield out of US cash. So across the fixed-income spectrum there are some quite exciting opportunities at this point in time. Corporate investment-grade bonds are yielding in excess of 6%. On the other side, you’ve got high yield edging closer to 9%.

And then emerging market debt is actually quite an interesting opportunity for us. There you have the benefit of a very weak currency as well as a cheap asset. We all know emerging markets; they’ve been out of the starting blocks much faster than the developed world when it comes to hiking rates. Subsequently inflation has subsided and real yields in those countries are very, very attractive – and that includes South Africa. But with that said, if you allocate to fixed-income markets, just be very aware that a lot of those bonds can exhibit equity-like characteristics. So that needs to be taken into account in terms of position-sizing when you build a multi-asset portfolio for a client.

SIMON BROWN: That’s a good point, because normally we would look at bonds and we would think of them as uncorrelated to equity, as different from equity. They’re giving in some cases almost equity-like returns and in other cases almost equity-like volatility.

DEBRA SLABBER: Absolutely, and especially in the high yield space. Lately we can even argue [that] in the treasury space, longer-dated treasuries have actually been so volatile. So it’s a very, very important point that traditionally fixed-income bonds have just been uncorrelated to equities; they had their role to play in a portfolio and it was great. Today that asset-allocation decision and building a multi-asset portfolio is somewhat more complex, I would say.

SIMON BROWN: What about China? The other big story a year ago was the hope that after the ending of the zero-Covid policy China would have a boom year. It has disappointed a bit. Is there still opportunity there?

DEBRA SLABBER: Simon, China’s an interesting one for us because you are right. They came very quickly out of Covid at the start of the year. The market was very excited. We saw a little bit of a consumption recovery, but a very narrow part of China had this consumption recovery. But their growth numbers are disappointing. Their spending numbers are disappointing. They have issues in their property sector, they have issues from a demographic point of view, which makes the market extremely nervous.

However, if you look at the emerging market complex, for us China’s actually one of the standout opportunities. The reason for that is that we think there’s been a lot of bad news being priced in, and that resulted in this incredibly weak sentiment. And China Tech in particular has decoupled completely from US Tech – you mentioned US Tech earlier – so you’re buying assets at very, very attractive valuations with a lot of bad news already priced in.

So longer term we still think China’s a compelling opportunity for us. But again, if it comes to jurisdictions like that, we pay very careful attention to sizing those positions correctly, because the range of outcomes can be quite wide – don’t get me wrong,

SIMON BROWN: I take your point on that, and perhaps sizing is another whole conversation.

We’ll leave it there for today. Debra Slabber, portfolio specialist director at Morningstar South Africa, I appreciate the insights.