​The year kicked off in familiar fashion as markets continued where they left off in 2021, but only for a little while. Any optimism for an uneventful 2022 was soon squashed as we saw the South African parliament building engulfed in flames, the protests in Kazakhstan take a turn for the worst and geopolitical tensions rise as Putin deployed more troops on the border of the Ukraine.

It was indeed a difficult time after the news of Putin’s actions, with equity markets worldwide taking a knock of between 3% and 5% in one day. The risk-off environment continued throughout the rest of the month negating the positive start of the first two weeks of the year. For the US market, we saw this as a welcome breather after the run of almost 29% during 2021. But, even with the recent downturn, The S&P500 (as most US equity indexes) is still on very high valuations. With consensus analysts’ estimates pricing the Index on a multiple of 18 times forward earnings at the end of 2021, it is difficult to see the market holding up over the medium term.

With the Omicron wave slowly dissipating and the effect of Covid19 becoming less significant, it gave the FED more reason to start looking at the massive elephant in the room… inflation. With US inflation numbers reaching 30 year highs by the end of December, it was no surprise that the FED turned hawkish in mid-January. Although not unexpected, it paved the way for other countries to also start with a hiking cycle of their own, not wanting to fall behind and watch their currencies depreciate too far. It seems like to only odd-one-out is China, that recently announced a rate cut of 10bps signaling that they are ready and have the capacity to further stimulate their economy.

The general hawkish nature of the FED gave an extra boost to the USD that is still looking strong versus most counterparts, especially emerging market currencies. This also continued the trend of rotation from growth counters into value counters as the valuations of some of the growth companies seem quite unsustainable in a contractionary environment.

With all of this being heavily debated during our weekly investment committee meetings, we are less optimistic on the US market in comparison to other developed markets. However, the other developed markets along with most emerging markets also have their own problems to worry about and the current geopolitical environment is not making it much easier. Overall, we are more cautious on risky assets than we were at the end of December and proceeded to take some profit and reduce risk within our funds. Global bonds are also not providing much in terms of yield and should come under more pressure with a global hiking cycle during the next 24 months. This left only cash as an option for the near future, until such time that we can muddle through the uncertainty and have a clearer way forward.

 

Jacques de Kock

Quantitative Analyst & Portfolio Manager

 

 

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