Inflation is still a key topic for discussion as well as the impact of Covid-19 surges, their impact on global supply chains and the ultimate impact on the consumer. Jacques de Kock provides a summary of this week’s investment meeting below:

 

International

When looking at short term technicals this week, the Dollar is seemingly still under pressure with the GBP and the CNY showing some strength. We are also seeing global equities being a mixed bag, but generally trending flat or bullish in the short term.

When looking at inflationary pressures and the effects thereof, we see many factors to consider. Although the FED has indicated that tapering could be on the cards in the near future, it seems like there is some pent-up demand for government paper at the right price. This could help to keep rates low for a while longer without the FED using QE. Another factor to consider is the supply chain constraints and shipping costs globally. Andy Pfaff mentioned that monetary policy can only modulate demand and cannot supply the goods and labour that the economy needs. He then quoted Rick Rieder (Head of Global Asset Allocation at Blackrock) in saying:

“The biggest drag on the economy is supply bottle necks. This is going to result in price pressures”

With global supply chains being battered by fresh Covid-19 surges, the cost of shipping is rocketing. This is also coming through in commodity prices where some suppliers are not able to push through cost increases onto consumers.

The sell-off in PGMs is still going, with our technical indicators showing some more short-term bearishness. Over the long term, however, we are still positive that the drive for a “green economy” is something that is going to gain more and more momentum and should push up demand for PGMs and copper.

 

South Africa

Short term technicals are showing lots of bearish signals with the ALSI, Top40, Financials and Industrials breaking down through support levels. The ZAR was inching higher this week but could still face some headwinds in the short term. 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 also discussed recent property trends from a local perspective. Although the market has been rather flattish since late April, we are seeing most REITs putting forth some stellar financial results. With the likes of Fortress, MAS, Growthpoint and others working hard to reduce LTV ratios and sure up balance sheets, their efforts seem to be paying dividends (literally). Although they are coming off a very low base in 2020, dividend payments have increased significantly, and it seems like some of the rental relief pressure of 2020 is starting to subside. SA listed property is not out of the woods yet, but we are keeping a keen eye on this sector going forward.

 

Conclusion

We are still concerned about risk assets (globally and locally) within our portfolios and remain with our “slightly underweight” exposure. The relatively cheap nature of EM and South African equities is not grabbing our attention and we feel that there is more scope in developed markets to continue with economic stimulus to manufacture growth.

We are, however, monitoring the situation on foreign outflows within our bond and equity markets. If we see the flows turning from outflows to inflows, we will be ready to capitalize within both the equity and property market.

 

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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