The major driver of short-term volatility in markets is the expectation of higher US inflation. The market is expecting a short-term inflation upside surprise, not only due to base effects, but also due to the contributions of higher PGM metal, oil and food prices. Covid-19 related supply constraints are influencing prices, which means producers and businesses are adjusting the prices of goods higher. This is also a short-term obstacle for Emerging Markets, like SA, where 32% of the inflation basket is reliant on transport and food prices.
These short-term worries are influencing the US 10-year yield trajectory, which is now trading close to 1.75% p.a. relative to 0.5% a year ago. This makes the US yield differential to the Euro (and other major currencies) more attractive to buy USD assets and props up the DXY (trade weighted USD Index) to move above the 200-day moving average. A stronger US Dollar normally means a risk-off scenario, and this is what bothers market participants at present.
Inflation fears, potentially more fiscal stimulus, massive excess savings and higher disposable income for developed market (especially the US) consumers makes for volatile markets. Our view is that this trend is a short-term cyclical phenomenon and not a secular long-term trend.
Back in SA, our ZAR is relatively stable and the JSE has continued to outperform most Emerging Market and Developed Market indices year to date. We have adjusted our risk score to be marginally underweight risk assets as the market has had a significant rally since March 2020. The higher bond yields in the US also caused a sell-off in Emerging and SA Bond markets. We maintain that Emerging Market and SA long duration bonds are attractively priced. However, while the US dollar remains strong, it serves as a headwind. Who knows, but maybe more stimulus from the US is exactly what may cause a weaker US dollar and a renewed rally in Emerging Market risk assets.
We are using the current market volatility to tilt our funds and portfolios to achieve a balance between valuation-driven asset managers (or Value ETFs where we manage indexation solutions) and quality proxies. Some growth companies continue to trade at expensive levels despite their strong business model characteristics, while the anticipation of a global developed market economic recovery bodes well for the unloved value sectors and stocks.
The content of this article is for information purposes only and does not constitute an offer or invitation to any person. The opinions expressed are subject to change and are not to be interpreted as investment advice. You should consult an adviser who will be able to provide appropriate advice that is based on your specific needs and circumstances. The information and opinions contained herein have been compiled or arrived at from sources believed to be reliable and given in good faith, but no representation is made as to their accuracy, completeness or correctness.