This week’s investment meeting discussion focused internationally on the impacts of the Russian-NATO tensions, the continuing bullish commodity trend and the FED’s policy update. Locally we focused on equity markets, forecasted rate hikes and emerging market currencies. Jacques de Kock provides a summary of this week’s investment meeting below:

 

International

Looking at our technical indicators first, it seems that the USD has turned its head and is looking up just before the FED’s policy update. This makes sense as we feel that a rise in interest rates from the FED should be good for the USD in the short term. This is also coming through when looking at trading volumes, as it seems that traders are still positioning for a more hawkish tone from the FED.

What is of particular interest, however, is how the FED will convey this hawkishness given the uncertainty surrounding Russia-NATO tensions. This is best reflected in the fact that short-end US Treasury yields are rising, while safe-haven demand seems to be driving the long-end lower. This also led to conversations regarding geo-political effects on the markets currently. With Russia moving in on the border of the Ukraine and therefore making an attack seem very likely. This has caused a response from NATO and grave concern from the US and the rest of European Union.

The markets responded with a flee to possible safe havens with the USD, JPY, CHF and Gold being the major beneficiaries. This caused the bearish trend that we saw in last week’s technicals to continue in the US but also spill over to the rest of the equity markets, especially on the back of Friday’s sell-off across the globe. The Hang-Seng seems to be the only rose among the thorns and, although not immune to the sell-off on Friday, is still in a short-term bullish trend.

We are seeing a continuation on the bullish commodity trend with Brent Crude leading the way. It’s difficult to predict how long this trend will last, with market participants either calling it the top of the cycle or seeing a commodity “super cycle” on the cards. We are of the opinion that US infrastructure investment and possible Chinese stimulus through rate cuts as well as infrastructure spend, could bolster commodity prices going forward. It’s still a bit early to call the upside though, but we are eagerly awaiting the opportunity to climb into the market.

 

South Africa

Along with most other equity markets, the JSE took a bit of a breather the last week. In our view, this is not such a bad thing and could provide some buying opportunities in the near future. It is, however, difficult to say if this was a proper correction, or merely a reaction to what is happening on the Ukrainian border. The risk-off tendency seems to have also pulled through to the property sector as we saw the first sign of a bear trend in over a year.

The main concern, however, is what the FED and the SARB will do in the coming week. Although the market (FRA curve) is forecasting massive hikes in both instances, we are feeling a little less hawkish. Compared to the possible 300bps hike [over the next two years] predicted by the market, we think that 25bps hikes every quarter [200bps in total over two years] seems more likely and more sensible.

In general, EM currencies are also holding their own against the USD, with the USD-ZAR bouncing off the 15.4 mark.

 

Conclusion

We are concerned about the high valuation of the counters in the S&P 500 versus other developed market counterparts. We have seen a long bull market run from the US and have started to rotate out of US Growth counters in favour of US Value, non-US and Emerging Market counters. This stood us in good stead over the last month and we are considering moving more exposure away from the US Growth sector going forward.

We are also in the process of reviewing our neutral asset allocation, tactical tilts and our house view funds. This should provide a lot of clarity in our view for the next 12 to 18 months and should make for some interesting conversations in our coming Investment Committee meetings.

But for now, we remain 4.5 risk score for global and local assets with the discretion to move to 5 for local assets in the near future.

 

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. MitonOptimal South Africa (Pty) Limited is an Authorised Financial Services Provider Licence No. 28160, regulated by the Financial Sector Conduct Authority (FSCA) – Registration No. 2005/032750/07.MitonOptimal Portfolio Management (Pty) Limited is an Authorised Financial Services Provider Licence No. 734, regulated by the FSCA – Registration No. 2000/000717/07.

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