This week’s investment meeting preceded our Manager Feedback webinar on Wednesday. Thank you for making the time to attend.
Internationally, we focused on the ongoing crisis in Eastern Europe causing uncertainty in financial markets, the bearish trends of equity indices and surging commodity prices. Locally, we discussed the annual budget speech, Rand strength and the positioning of our portfolios amidst the current climate. Jacques de Kock provides a full summary of the meeting below:
Despite a small uptick in the last couple of days, almost all the equity indices are trending bearish over the short term. This is indicative of the risk-off market at the moment, and it remains uncertain on how far it can go and for how long.
Currency movements continue to reflect broader financial market uncertainty, with volatility the order of the day as investors weigh ongoing developments in Ukraine against potential second and third-round effects. On the one hand, Russia’s invasion has turned increasingly brutal, with this triggering further risk aversion that has driven a strong rotation into safe havens. On the other hand, surging commodity prices have bolstered many an EM country’s terms of trade, in turn supporting their respective currencies.
Gold and Brent Crude are running wild. The global oil market had already tightened significantly prior to the invasion after economies rebounded strongly from the pandemic. The disruption to Russian exports has the potential to drive crude prices even higher. Traders are paying the most in more than two years (going over USD110 per barrel) expecting that will happen; and we tend to agree. Although Gold declined on the day, it remained near a 13-month high. This is bolstered by fears that Russia’s invasion of Ukraine could turn even more brutal, aiding demand for safe-haven assets as investors weigh the potential fallout and sanctions.
All this being said, our major concerns regarding the Ukraine situation are how much disruption will be caused by the war and the consequent sanctions and the impact these will have on global growth and inflation. Roeloff Horne summarised it well in quoting some data from EM Analytics:
“The invasion in the Ukraine is causing a mass exodus of companies from Russia. The list is growing by the hour as foreign governments rachet up sanctions against them, close off airspace to their aircrafts and lock some banks out of the SWIFT money messaging system. There also exists the possibility that this could keep the FED even further behind the curve in an attempt to prolong support in an uncertain world and a slowing global economy. Which in turn will just add fuel to the already scorching inflation fire.”
We also discussed the impact of these issues on stocks that should not be influenced at all. This global risk-off environment is creating opportunities to buy stocks at valuations way below intrinsic value. These valuations could also realise much sooner than we think as the risk priced into some of these counters is equivalent to a Third World War doomsday prediction.
In South Africa we are facing our own issues as corruption and infighting continue to plague our economy. There are some positive factors, though. Minister Enoch Godongwana’s inaugural budget speech was one that was generally well accepted. There were no fireworks, but also no pie-in-the-sky promises, a refreshing turn of events. Many criticised the finance minister of not doing enough, but in the current state of affairs, our view is that they are doing what they can.
The sad reality of the Ukraine situation is that South Africa is actually a net beneficiary. Commodity prices and mining stocks are doing well, which in turn is helping our stock exchange and potentially boosting SARS’s tax collections. The Rand is also looking strong against most currencies, with only the Australian Dollar and New Zealand Dollar edging out the Rand’s muscle.
Our portfolios are well positioned at the moment and holding up in the current state of affairs. Our process and asset allocation philosophy have proven their strength in trying times and we are very pleased with the outcomes that we have managed over the last couple of weeks and months.
This does not mean, however, that we can relax and let our guard down. The global economy is in a very fragile space, and anything could still happen. We are vigilant in our attempts to understand the markets and the economic implications of what is happening in the Ukraine and the surrounds. This means that we will not hesitate to take our profits and de-risk, if need be, but it also means that that we are cognisant of buying opportunities that might arise from market exaggerations.
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.
Learn more about our Risk Score
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.