Our weekly meeting started on a rather sombre note based on the weak technical nature of the global equity markets in US Dollar and ZAR terms. Fortunately our spirits improved as we analyzed the performance of the SA Resource Index which we have backed as an overweight in our funds for the past year. Roeloff Horne provides a full summary of the meeting below:
Fundamentally we are now more concerned about global inflation (‘higher for longer’) due to the following factors:
- Sanctions and now a possible US embargo on oil imports from Russia. Russia is the No. 1 global producer of Palladium, No. 2 in Oil, Cobalt and Platinum and No. 3 in Aluminum and Nickel. This is not a temporary scenario and as the Ukraine and Russia are also major exporters of wheat, it will soon influence food prices.
- Years of fiscal stimulus, COVID-19 lockdowns and low interest rates have spurred developed market consumer expenditure which could add pressure to prices of goods.
- Especially tight labor market in the US (largest in 60 years) is setting up wage increase potential.
- Continued global supply chain disruptions and shortages.
- Higher oil price and other industrial metal prices.
- Potential contraction in globalization of economies.
In the short term it is hard to base our investment theories on the geo-political scenario in the Ukraine. We remain focused on facts and what we see in price action within markets. The US Bond yields are flattening – when analyzing the 2-year vs. the 10-year yield. The US Fed (and other developed market central banks) are under a lot of pressure to raise rates as they are significantly behind the curve. We cannot assume that the Fed will hold back on rate hikes due to the geo-political scenario at present.
It is therefore clear that long duration assets like expensive growth/technology companies, long-dated bonds will remain under price pressure and that portfolios should be more exposed to short duration assets or of a value, cyclical nature. Exposure to energy/resource companies should be maintained in the short term, despite a big rally in prices lately.
The other element within the global economic challenges is to invest in clean energy and infrastructure – especially in Europe. It will continue to add to demand for certain resources like Cobalt, Copper, Zinc and rare earths. As we discuss energy, it is fair to assume that oil prices will remain elevated in the short term as OPEC and Saudi’s informed the market that they are not in a position to increase oil production in the short term as they also expect slowing demand due to less optimistic global growth projections. That said, we do not think that oil prices will completely run away above US$150 per barrel.
Although we are not sure of the trajectory of Chinese economic growth prospects, they are motivated to grow their economy which could add demand for commodities going forward. We remain optimistic that global growth projections will remain positive and that a stagflation period is not our base case scenario.
The current Resource price appreciation is assisting the stability of the Rand, but we do fear higher inflation in SA due to higher oil and food prices which will take its toll on household income spending. Within our funds, we are now underweight SA equities after a significant rally over the last 2 years and have parked the proceeds of the sale in global equities in SA and US$ cash. We will re-visit our model portfolio allocations continuously as some of our underlying managers have changed strategy or are positioned to safeguard client capital in the short term.
We remind investors that volatility does create opportunity, but this time the opportunities to generate capital gains are in different sectors within the market relative to the COVID-19 crash as well as the GFC market collapse.
We remain vigilant and will report our actions and discussions on an ongoing basis.
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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.
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Head of SA Portfolio Management
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