This week the team addressed the bearish trend that remains in markets despite the uptick seen over the last couple of days. On the global front – interest rates, bond markets, inflation and commodity backwardation were on the agenda, with SA listed property dominating the discussion from a local perspective. Jacques de Kock provides a summary of this week’s investment meeting below:

 

International

After a tough couple of weeks in the market, we saw a bit of an uptick in the last couple of days. This has, however, not removed the bearish trend within the global equity space and might be reason to take profits and hide in safety. It will be interesting to see how the market continues throughout the week and if it maintains this sharp upward trend, or fades back down as most of the technical charts suggest.

With interest rates globally moving into a hiking cycle, the effect on global bond markets and the relative inflation movements should be the theme of the year. As we alluded to last week, the hawkish stance of the FED bolstered the USD in the short-term and our charts show USD strength versus most other currencies.

Moving away from the US into Emerging Markets, it seems like South Africa is the strongest of the EM markets. The problem, however, is how the situation around Geopolitics will play out and the effect it will have on the different role players. Russia is in a great position and basically holding Germany and the rest of Europe at ransom with the threat of putting a plug into their supply of gas into the region and, unfortunately, any negative reaction out of this tension could cause ripples that spread much further than just the parties involved.

We also had a long discussion on the supply and demand of commodities and the effects thereof.

Currently, commodities are in backwardation as demand is outstripping supply, and we do not see this coming back any time soon. This also explains some of the inflation fears over the next 18 months, especially when focusing on oil and gas prices. It seems like we are looking into big energy shortages in the near future.

 

South Africa

Similar to the global view, we are still seeing bearishness throughout the equity market. Financials are looking the best of the bunch on a short-term bull trend and the NewFunds Value ETF still looking good on the growth to value rotation. R186 and the R2030 are still trending flat even after the SARB’s 25bps hike. This also helped the Rand with seemingly only the USD and the Brazilian Real being able to outmuscle the ZAR over the short term.

We had a thorough discussion on our view of SA listed property. With the property sector being highly correlated to economic growth, we have some concerns about the growth prospects in the short to medium term. After 18 months of steady growth from the property sector, we feel that the factors on the downside are becoming too strong to ignore. Our conclusion was that we take a more conservative approach on the property sector over the short-term and re-evaluate our position in the coming 12 months.

 

Conclusion

We are nervous about our risk weightings in our CIS funds and have identified a few “red flags” that we need to address:

  • Rising interest rates
  • Higher inflation globally
  • Slower economic growth
  • Uncertainty and volatility because of geopolitical risks
  • Uncertainty regarding the response of the FED and the SARB to higher inflation numbers

So, because of these factors and the recent uptick we saw in the market, we have decided to take some profit and reduce risk asset exposure in our CIS funds. We see this as a short-term cautionary measure to protect our clients’ investments in these uncertain times. We therefore keep our risk rating at 4.5 for both global and local risk assets but will manage our CIS fund exposure to between risk score 4 and 4.5 instead of 4.5 to 5.

We are also in the process of revisiting all our model portfolios and their underlying fund managers. We will take into consideration the exposure changes of the underlying managers and make sure that our total model portfolio exposure correctly reflects our asset allocation views and convictions.

 

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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