It was another month of risk-off behaviour in equity markets in general, but especially in most Emerging Markets. The Russia-Ukraine war is still playing a massive role in risk appetite around the world, with the outcome still highly fluid with any news, positive or negative, causing great swings in market sentiment. The S&P 500 returned -1.96%, the MSCI ACWI ex USA -5.29% and the MSCI EM Index the worst of the bunch at -7.57%.
The Russian stockmarket has also been “closed” for most of the month causing some asset managers (that have Russian exposure) to reduce the value of their holdings or, in some cases write them off completely. In conversations with one of these managers it seems as though the value of these assets shouldn’t stay at a zero valuation, which could provide a significant opportunity going forward.
In China, the government is looking to stimulate the economy through creating liquidity in the market and possible infrastructure spend. This was well received in the market, unfortunately it came at the same time as some more regulations and clampdowns on tech companies and affiliates, which spooked some investors causing the market as a whole to end in the red for the month.
But the talk of the month was probably the inflation figures globally. The US reached 7.5%, the highest inflation figure since 1982, scaring away even the die-hard fans of the “transitory”-camp. In the rest of the world we saw similar record highs, with the UK reaching a 30-year high of 6.2%. In contrast, those countries that started with rate-hiking cycles earlier than others seem to be more immune than the rest. It is going to be an interesting few months ahead though, given that (in our view) oil price increases and supply problems in the agriculture sector are still to have their full effect on global inflation.
Moving over to our local market, the picture seems somewhat “rosier”. Yes, Naspers and Prosus continued their downward trend amidst renewed pressures on Tencent (mostly coming from the Chinese government) and, yes, we have our own political and structural issues to worry about. But other than that, our market seems to be rather healthy. We expect the effects of the conflict in the Ukraine to last for quite some time, even if Putin does decide to quit his campaign within the next month. This bodes well for the commodity sector that’s coming off a decent monthly return of 2.74% and a six-month return of 20.03%. This is also playing into our resources sector that, despite a minor drawback (-1.05%) for the month of March, has returned 19.02% year-to-date and 44.76% for the last 6 months.
Because of the strength in demand for commodities, we have also seen the Rand strengthen versus most other currencies, despite a global risk-off market and inflationary pressures. This is also bolstered by some foreign net buying of our equity market, the first time that we are experiencing that for quite a while. The other sectors in our equity market also had decent returns, with only Technology (-13.81%) and Consumer Staples (-5.17%) pulling the average returns down considerably.
In conclusion, our portfolios have performed well over the last month, and we are pleased with how our process has contributed to that. We are still optimistic on SA Bonds with a barbell strategy seemingly the optimal play in our market. We are also bullish on Commodities and SA Resources Companies, and we think there is some continuation in the returns that we have seen thus far. Our cautious stance on global equities also paid-off, but we are seeing some opportunities (particularly in the Emerging Market sector) that are piquing our interest. Overall, we are happy with our current allocations and are keeping our conservative stance in areas where we feel the risks outweigh the benefits.
Jacques de Kock
Quantitative Analyst & Portfolio Manager
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