Our investment committee meeting discussion focused on the global risk-off environment, fuel shortages in the UK and the impact of the Chinese Government’s downward pressure on power consumption. Locally, our discussion centered around the optimism around SA Inc counters and the factors we are paying close attention to. Jacques de Kock provides a summary of this week’s investment meeting below:

 

International

A risk-off environment globally continues, with the US Dollar and the Chinese Yuan gaining the most from the flight to safety. Due to this, we are also seeing the USA 10 year treasury yield starting to turn bearish prompting the question as to what level constitutes a switch from equities to longer duration treasury bonds? Commodities remain a mixed bag with PGMs still trending downward and ore prices also on the backfoot. Most of the conversations, however, centered around the oil shortage in Europe with many petrol stations running dry last week.

UK transport minister, Grant Shapps, urged Britons to “Behave normally, don’t panic buy” as they were queuing for fuel in fear of being stranded without transport. Business leaders have warned the situation risks major disruption beyond fuel deliveries and could have massive implications for retailers and other product suppliers as they head into the Christmas season.

In the US, investors await direction in terms of the US debt ceiling and infrastructure bill talks – both are potentially positive market moving events, but do contribute to investors’ nervousness.

In China, the government is cutting down on power consumption and it’s putting downward pressure on many local industries. The crackdown on power consumption is being driven by rising demand for electricity and surging coal and gas prices as well as strict targets from Beijing to cut emissions. It’s coming first to the country’s mammoth manufacturing industries: from aluminum smelters to textiles producers and soybean processing plants, factories are being ordered to curb activity or – in some instances – shut altogether. We are also seeing Chinese authorities adding liquidity to the banking system to ensure that orderly investor behavior is maintained.

The supply chain issue is still a hot topic in our investment meetings, and we think that there is still more pain that is going to come through global markets in the near future.

 

South Africa

In the local market, we saw a bounce back in the ALSI and the Top 40 index, but we remain in bearish territory. The rest of the indices also remain under pressure in the short-term with only FINI and SAPY marginally bullish. With the risk-off market globally, we see more weakness in the Rand as it weakened versus most other currencies.

In our conversations with fund managers during the week, we are getting more optimism for SA Inc counters within portfolios, especially within the banking sector. We do feel that there is merit to this narrative, but there are still some factors (interest rates, inflation pressures, local elections) that we would like to see play out before we will commit more SA Inc and SA Value proxies to our strategy.

Local elections have been confirmed for the 1st of November. Our base case is that the ANC and President Cyril Ramaphosa will consolidate their position but there is a chance for the EFF to win more municipal regions which could put policy makers in a compromising position.

 

Conclusion

We remain invested (but cautious) in risk assets both locally and offshore with risk ratings of 4.5 for both categories. Although there is a lot to ponder on the negative side, there remain many positive situations that could play out over the next 6 to 12 months. As stewards of our client’s capital, we therefore remain cautious, but ready to pounce on opportunities once they arrive.

 

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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