After an “interesting” start to the year, we were all shocked at the news of events in Russia and the Ukraine. This caused global investors to look for safe havens and the markets to turn risk-off as a consequence. It is only in the resources and energy sector that we are seeing some positive signs.

From an asset allocation perspective, we are still concerned about high valuations and concentration risk in the S&P500. Even after a bit of a pull-back in January and February, we feel more comfortable in allocating capital toward certain emerging market (EM) and other developed market value counters. Global bonds are still unattractive, especially in an interest hiking cycle, which we feel is going to be one of the main themes for the next 18 months.

Together with a global hiking cycle, the inflation conundrum will also be a major factor influencing policy makers and economists alike. Although some emerging market economies seem to have a better grip on containing their inflation figures, the US and some other developed market economies are struggling to do so.

Our portfolios and funds have had very little direct Russian assets, but all have exposure to global equity markets. Our model portfolios have exposure to some managers who have been very conservative or circumspect about the global economic conditions going into 2022.

A recent global market overview issued by Epoch Asset Management highlights five medium term challenges due to the Russian-Ukraine current scenario:

  1. The Ukraine Invasion: A third dagger into globalization and global supply chains
  2. A New Era for Europe: Defence budgets are likely to rise dramatically
  3. The Weaponization of Money: A turning point away from USD hegemony
  4. The Impact on US Growth and Inflation: Don’t expect the Fed to pause (absent a Lehman-esque tightening of financial conditions)
  5. Oil, Commodities and Green Energy: The end of “pre-emptive underinvestment”

We have de-risked our funds since the 14th of February. Our portfolios are managed by several seasoned professionals who will continue to seek the opportunities that market volatility brings. We do think that it is prudent to wait for more clarity in terms of geo-political events and risk before we will add risk to our funds and portfolios.

In South Africa, we seem to be more in control of our inflation figure, but we do foresee some steep interest rate hikes in the next 18 months. We are still quite bullish on SA equities, though, as we see some opportunities in some sectors within the SA market.

As is stands, EM is at discount to global valuations, with SA at a discount to the overall EM Index. We feel that SA mining stocks are making the overall JSE All Share Index look optically cheap, and that the commodity bull run should continue. Some SA Inc. stocks are also looking cheap, but we are weary of Naspers and Prosus over the short to medium term as we are unsure of what the Chinese government could do next.

We are also seeing some value in our bond market. Our government bonds are trading on a real yield in excess of 4% (depending on duration), which is one of the most attractive in the world, despite some political risk.

We feel that our funds and portfolios are well positioned now – our overweight commodity and resource exposure certainly assisted our improved relative performance in the short term. 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, months and years.

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 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 even de-risk more. It also means that that we are aware of potential buying opportunities that might arise if global geo-politics find a resolve soon.

 

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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