Our investment committee meeting discussion mainly focused on the Evergrande situation and Chinese regulation. Locally, we unpacked the bearish nature of SA technicals and the reputational risk of the Expropriation Bill. Jacques de Kock provides a summary of this week’s investment meeting below:

 

International

We are seeing general weakness in the market with uncertainty and volatility the biggest influences in the short term. Most risk asset technicals are edging downwards with some way to go before hitting resistance levels. Due to this, we are also seeing a bit of a flight to safety into the Dollar and Yen, strengthening both currencies in the short term.

The main discussions, however centered around the Evergrande situation and Chinese regulation. Shaun McDade gave a very concise summary of our view:

“I’m sure it’ll continue to cause wobbles, but from a systemic perspective, there will be a rescue because it’s “too big to fail”.  It is, however, indicative of high leverage and poor management within the wider Chinese financial system. This will probably lead to further regulatory measures and restrictions from government, but that’s a China-specific issue and any market distress should remain localised.”

According to the CSI BARC Index (a useful measure of global market tensions) there is no need to start de-risking portfolios just yet.

 

South Africa

From a local perspective, there is general weakness in SA technicals with bears running amok. It’s only SA listed property that is staying bullish (although only marginally so) in the short term technicals. The Rand is still weak versus all currencies and we expect that to continue in the short term.

We had a brief discussion on the recent Fraser Institute Report that dedicated an entire chapter to “The Dangers of South Africa’s Proposed Policy of Confiscating Property”. Although the author, Martin van Staden of the Free Market Foundation, gives a rather scathing report on the current situation, we feel that it’s more negative on the image of South Africa than the actual content of the Expropriation Bill would have. Unfortunately, as a country lobbying heavily to foreign investors, a dent to our image is the last thing we need right now.

 

Conclusion

Although we are staying prudent in our risk asset exposure at the moment, we feel it’s important that we have triggers in place that would warrant an increase in risk asset allocation. Through our discussions we identified four such events and situations:

  1. From a fundamental perspective, we are still waiting for foreign investment to move into our bond and equity markets. This could be triggered by many different “risk-on” events and should be a massive catalyst for an SA recovery.
  2. China dealing with the issue of an overly paternalistic way of governing and causing uncertainty around future regulations. Investors want stability and predictability in the areas that they invest, and clarity on the current issues should go a long way in bringing asset flows to emerging markets in general.
  3. When bad news continues, but prices cease to fall.
  4. The reaction of the FED and timing and level of planned tapering of stimulus.

 

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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