With this round of investment committee meetings coming to an end this week, we look at our expectations for inflation, global growth, currency movements and the SA political landscape. Jacques de Kock provides a summary below:

 

International

From a technical perspective, we are seeing some short-term weakness from both the US Dollar as well as the Japanese Yen. This is partly due to employment data out of the US on Friday coming out significantly weaker than expected. A payroll increase of only 235k in August, versus consensus expectations for a 733k print, breaks the streak of labour market tightening in the previous two months. This and other factors could cause the US Federal Reserve to be more reluctant in tapering its monetary stimulus – at least until the ongoing wave of coronavirus infections subsides.

We are cautious of a looming inflation surge globally and the effect it might have on emerging markets and South Africa in particular. At the moment, the Fed is adamant that inflation will be transitory and that there won’t be any major effects on world markets. We are not so sure about that conviction and are putting safety nets in place in our portfolios to safeguard our clients should a negative inflation scare occur.

 

South Africa

On the local front, the ZAR could find the going a little tougher in the months ahead. Although the Dollar is in a short-term decline and the ZAR still retains a high degree of resilience courtesy of the commodity cycle and the impact on the trade account, any normalisation of consumption and investment patterns will slowly detract from the resilience of the ZAR.

We are also keeping a keen eye on foreign investment into South Africa (or lack thereof), as this should have a massive impact on market prices in the next year or two. Unfortunately, the picture South Africa is painting to the outside world is not a pretty one and the recent looting and violence is not helping our cause.

It seems, however, that the vaccination rates among the new group (18- to 34-year-olds) is going well and that the current wave of infections is subsiding. This could bring some relief in the form of a reduced restriction level and hopefully also some economic growth.

 

Conclusion

At MitonOptimal, we still believe that it is our responsibility to manage our clients’ capital in a calculated and prudent way and protect them from major negative market scenarios. We are therefore still skeptical on South African risk assets, but keenly await the appearance of any positive catalysts. Developed market equities still seem like the place to be (at the moment), but if the opportunity should arise, we are ready to tilt into SA equities and property to capture the upside.

 

Risk Score

LOCAL: 4.5

 

GLOBAL: 4.5

 

Learn more about our Risk Score

At MitonOptimal we utilise our proprietary optimiser to calculate a SA and Global risk rating. This is a rating out of 10, with a rating of 5 reflecting our neutral risk position, 0 being a totally risk-off stance and 10 totally risk-on. We review and set the tactical risk rating on a weekly basis at our global investment meeting, and the outcome of this review may result in a tactical tilt to our portfolios. In extreme circumstances we might review our strategic risk score. For example: when we declare a risk score of 4, it means we are cautious relative to our long term strategic asset allocation plan – alternatively, when we declare a risk score of 6 we are more aggressively positioned relative to our long term strategic asset allocation plan.

 

Jacques de Kock

Quantitative Analyst & Portfolio Manager

 

 

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.

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