US stocks remain around all-time peaks and the JSE recovered during October. Coronavirus treatments, easing travel curbs and the recent approval of a $550 billion US infrastructure bill have aided sentiment. Key central banks have also indicated they plan to scale back loose monetary policy gradually. But a key risk is that the inflationary pressures caused by creaking supply chains and energy prices last longer than officials expect. Gold has now recovered over the last 2 months and dare we say that crypto currency markets are also trading at all time highs. It is reasonable to assume that our portfolios cannot invest in crypto currencies and as purists this phenomenon continues to question who the ‘greatest fools’ are.
Within the S&P 500, 79% of companies reported higher than expected earnings results.
The US Dollar remained strong and stable as global bond yields spiked up in anticipation of the US FED speech in early November. The US FED announced a slowdown in US bond purchases and cooled market expectations by promising low interest rates until the US experiences stable employment and economic reform. This announcement calmed the global bond markets as yields contracted lower after month end.
Within our global equity exposure, we remain exposed to quality and value proxies but overweight the US/ Developed markets relative to emerging markets demographically and quality over value as a style proxy. Valuations do look stretched in the US equity market, but the economic policy remains very supportive, especially relative to Emerging markets as the current China regulatory rhetoric, a slowing Chinese economy, and concerns in the China Property market (debt defaults) continue to cloud emerging market sentiment negatively. We do however think that if global inflation is transitory and the Chinese government deploys more market friendly actions, the investor sentiment could benefit higher yielding emerging market bonds and the attractive valuation argument of emerging market equities. If US and global infrastructure spend is accelerated in the short term, it could re-ignite interest in ‘producer’ stocks which are found primarily in emerging market countries. We will first wait for confirmation of this rhetoric before we aggressively position portfolios accordingly.
In the short term we continue to be mindful of slowing global liquidity as key central banks tighten monetary policy and the global inflation risks. From an emerging market perspective, a slowing Chinese economy and near-term EM economic recovery risks due to structural concerns, poor vaccination success make EM assets risky from a global investor perspective. We therefore continue to seek some negative correlated funds/asset classes to hedge our portfolios against potential near term risks. Taking a longer-term view, we continue to be optimistic that our portfolios will generate the required absolute return mandate especially in the light of ‘lower for longer’ global interest rates.
Director and Head of Portfolio Management
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