The end of November showed renewed angst in the market as the Omicron variant of the COVID-19 virus reared its menacing head. Volatility spiked as many countries reacted too hastily in a knee-jerk effort to avoid a catastrophe and South Africa bore the brunt of it. We were put back onto the UK “Red list” and deemed the pariah of the world yet again. 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 spend 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 into the green. This is of particular interest for South Africa as we are one of the biggest culprits in this scenario.
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. The South African All Share Index gained 4.4% (in Rand 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.
From a SA capital market perspective, we continued to benefit from global equity market and consumer behaviour as fiscal stimulus and COVID-19 treatments aid consumer spending activities. We also saw a recovery in our equity market after the quick pullback that came with the Omicron variant. It is still unclear, though, how our markets will react when more accurate data regarding the new variant comes through. We were quite disappointed in the re-introduction of the travel ban to and from South Africa, especially in what was supposed to by a bumper tourist season. This meant that some much-needed foreign inflows are staying abroad, having a crushing effect on our tourism sector. We are, however, hopeful that some local travellers (that won’t be able to visit their favourite offshore holiday destination) will decide to spend their hard-earned cash on a purely South African get-away and enjoy the fruits of what our own country has to offer. This could offset a small portion of the massive hole left by a non-tourist holiday season.
The midterm budget speech was less spectacular than some might have hoped, but still contained some hope for the future. Broad strokes were painted when it came to policy reform with the big-ticket items kicked along to the year-end budget speech next year. But it feels like we are heading in the right direction, even if only in words. If these measures and plans go through in action, though, we could be looking at a much brighter future in the medium to long term.
Our portfolios remain exposed to SA and global equities – within SA equities we remain more exposed to stocks that face the global consumer, energy, technology and commodity markets and remain cautiously exposed to stocks relying on a positive SA economic growth trajectory. Within our global 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. 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.
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 a SA capital market perspective, Omicron worries and near-term SA economic recovery risks due to continued load shedding remain a concern. 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.
Jacques de Kock
Quantitative Analyst & Portfolio Manager
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