The end of November showed renewed angst in the market as the Omicron variant of the COVID-19 virus reared its head. The volatility spiked as many countries reacted too hastily in a knee-jerk effort to avoid a catastrophe. Since then, it is believed that the new variant is less fatal than previous variants, but studies are yet to confirm this hypothesis.
We also had the IPCC report which showed some scary statistics regarding the state of our planet and our influence on global warming. Many countries and companies have vowed to reduce carbon omissions while others put down plans that were less “immediate” in nature. These plans and structures could have a meaningful impact on the investment landscape as they require additional infrastructure spend, research spending and investment into renewable energy. Many countries on top of the “naughty list” will also need massive monetary support from the wealthier countries to get their carbon footprint in the green.
The MSCI World Index ended 2.2% down in US Dollar terms in November, while MSCI Emerging- and Frontier Markets lost 4.1% and 4.6% respectively. All countries within MSCI World posted losses over the month. The worst coming from the European region, as lockdowns resumed in certain countries. South African All Share Index gained 0.3% (in Dollar terms) in November, with the Rand depreciating by 3.8% against the US dollar. Asian markets shed 3.6% over the month, with heavyweight China losing 6.0%, reversing October’s positive return.
US stocks remain on elevated levels despite the November downturn and the JSE recovered somewhat after the Omicron scare. 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 3 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.
The US Dollar remained strong, but the ever-present Chinese Yuan is putting up a fight. 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. Although 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, it seems like the Chinese market is decoupled from the rest of the world. A strong showing from their equity and bond markets going into December is possibly providing a unique buying opportunity. We think that if global inflation is mostly 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. Inflation fears are still a key concern as we head into a new year and our portfolios are positioned for inflation to stay elevated a bit longer than markets initially thought. Taking a longer-term view, we think most of the inflation factors should be transitory and 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.
Jacques de Kock
Quantitative Analyst & Portfolio Manager
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