This week our investment committee meeting focused internationally on the mixed bag of global equities, the continued geo-political tensions and the impacts on inflation and commodity prices. Locally, we discussed the Rand strength, equity and bond markets as well as the election season that is around the corner. Jacques de Kock provides a summary of this week’s investment meeting below:
From a technical perspective, global equity indices have been a bit of a mixed bag. The S&P 500, Nasdaq and the Russel 1000 Value are showing strong bullish signs with the Vix, China A shares and the Shanghai continuing the downward trend. The USD also seemed to gather some momentum on the back of a hawkish FED and looks strong against most other currencies.
Still, the major themes up for discussion this week centered around the Ukrainian war and the future of commodity prices. Both will continue to play a major role in global and local markets, and we could be feeling the aftereffects for quite a while.
There seems to be some progress in the peace talks, but any information coming out of the region is difficult to digest and not always very reliable. The Russian equity market is still not ‘open’ as there was only a few hours of trade allowed with short sales not permitted and non-Russians unable to sell until the 1st of April (rightly pointed out by Andy as a possible April fool’s joke). So, it’s still difficult to predict the direction of risk trades in the short term, but there seems to be some positive news priced into the market already.
On the commodities front, the discussion agreed that it seems they will continue their strong run of the last couple of months. With only energy consolidating within range, the rest of the indices keep trending higher. The biggest problem, however, seems to be wheat production. With Russia and the Ukraine combined being responsible for almost a third of global production, there should be massive implications on global supply and demand. This will then have an impact on the price of essentials like bread and other baked goods, the staple of people living in poorer circumstances.
In South Africa this could be of major concern, especially going into ‘election season’. There is going to be a lot of pressure on government to ‘help out’ when the price of bread starts soaring, given that the bulk of their support base is going to feel the brunt of it. This could also cause some instability on a political front if they don’t react quickly enough.
That being said, the Rand remains strong, mostly because a strong trade account remains a feature of the SA economy. While still in surplus, it is becoming clear that SA is struggling to take full advantage of its terms of trade due to Transnet’s logistical challenges and its inability to carry bulk exports to the ports. Still, with the commodity counters running strong and South Africa benefitting from Russian sanctions, some consolidation is on the cards.
It’s still not clear for how long these benefits will last. But in the meantime, we are seeing our bond yields turning bullish and our equity market staying strong on the back of foreigners being net buyers.
Given lots of pressures on the global and local equity markets, there are still many factors creating buying opportunities. This means that we stay with our risk scores of 4.5 both locally and globally, but erring more to the upside, possibly going to 5 in the future.
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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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Jacques de Kock
Quantitative Analyst & Portfolio Manager
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