This week our investment committee meeting took a largely SA focus with discussions centering on the discovery of the Omicron variant of COVID-19, subsequent travel bans and the impact on global and local markets – which led us to adjust our SA risk score from 5 to 4.5. Jacques de Kock provides a summary of this week’s investment meeting below:
We had our weekly investment meeting on Monday this week. This was partly because of our feedback sessions with IFAs taking up most of our diaries, but also because of the happenings on Friday. The news of the Omicron variant of the COVID-19 virus had the markets in a tailspin, especially here in South Africa. We saw the Rand blow out past R16.10 to the Dollar, bond yields spike up sharply and the equity market sell off rapidly.
Unfortunately, the chaos wasn’t contained to South Africa. We saw most global equity markets selling off, with the S&P falling 2.3% on Friday. The Energy (-4.1%) and Financial sectors (-3.3%) were impacted the most, with Healthcare holding up the best (-0.4%). Even commodities felt the burn with oil bearing the brunt of the sell off, falling 11.6% on Friday as investors expressed concerns around future travel and the impact on oil demand.
Our meeting discussions centered around our concerns over SA bonds and SA Inc equities and the road forward. We were pleasantly surprised by President Cyril Ramaphosa’s response on Sunday evening, basically calling out our European counterparts for overreacting in putting South Africa back on the travel “Red List”. He was also very candid in explaining that vaccination rates need to increase for us to stay out of 4th, 5th, 6th waves of infections and also alluded to possible restrictions for those that are not vaccinated. Although we feel that this is probably the prudent way to curb the spread and effectiveness of the COVID-19 virus, we hope that it does not come down to any type of forced vaccinations, as this could cause some backlash from the anti-vaxx community.
Overall, we think that most of what we experienced in the market was an overreaction. However, it is still too early to accurately evaluate the impact that the Omicron variant could have. We are quite disappointed that our fiscus won’t be seeing any of the tourism money that we so desperately need, but we hope that our foreign visitors will just postpone their vacations and not cancel. Gavin Betty also had an interesting addition: “Many South Africans were planning to go overseas for the December holidays. This is definitely not happening anymore, so hopefully they spend that money locally now. This could (in a very small way) offset some of the tourism income lost.”
Our conclusion to the meeting was that, although we think the “overreaction” should correct in the near term, it would only be prudent to drop our SA risk score from 5 to 4.5 with a view to take it back to 5 if and when the current situation corrects. Given that most of our portfolios are currently slightly underweight SA Equities, it doesn’t necessitate any changes at present. But that could change if the situation deteriorates further from here. We keep our prudent outlook on the portfolios that we manage and will be ready to reallocate capital when appropriate.
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.
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Jacques de Kock
Quantitative Analyst & Portfolio Manager
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