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 Covid-19 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 the 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.
Locally, we experienced the same sharp downturn as the rest of the world. With the JSE All Share taking a tumble of just over 3% on the 21st of January. This also pushed SA Listed Property into a bear trend for the first time since March 2020.
Political tensions remain high as the various volumes of the Zondo report bring to light scathing accusations against many of those that we trust to run our beloved country. And, although many will see these revelations as a step in the right direction, most of us are wondering if those implicated will actually face any level of consequence for their actions.
We also saw the SARB hike rates by 25bps this month, showing their intentions to curb inflation before it gets out of hand. This, as with the USD, gave the Rand the boost it needed to gain back some of the ground it lost to the US Dollar during the last few weeks.
Unfortunately, there are still many concerns weighing on our local markets. GDP growth remains stinted and the geopolitical tensions that are on the brink of boiling over, could cause a global risk-off trend. This will probably hit emerging markets the hardest, as a flight to safety should see assets move from there to developed market safe havens.
With all of this being heavily debated during our weekly investment committee meetings, we are more cautiously positioned with our risk assets exposure. Although we see more upside potential in SA Equity valuations, it’s difficult to manage through the uncertainty we are currently experiencing. 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. In contrast, SA government bonds are looking attractive at the belly of the curve and spreads to corporate rates low enough in our view to warrant more exposure.
Our portfolios and funds remain exposed to a variety of asset classes, and we continue to believe that SA and global equities will outperform inflation comfortably over the medium and long term. Investors must understand that fears of higher global inflation, potential higher US and local interest rates and geo-political risks may cause market volatility in the short term.
Jacques de Kock
Quantitative Analyst & Portfolio Manager
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