It felt like Groundhog Day in this week’s Investment Committee meeting with the short-term technicals still featuring many bears. The team identified the main events leading to the global nervousness and flight to safety, whilst discussing the local events compounding the situation here at home. Jacques de Kock provides a summary of this week’s investment meeting below:
This week’s meeting started out with some humor with Roeloff stating that he predicts that Gerry is going to sound like a stuck record during the short-term technical reviews. This was unfortunately not difficult to predict given the market reaction on Friday and Monday.
Throughout the presentation the bears were running amok, with only the US Dollar showing signs of strength. This was echoed by the VIX ticking up considerably with nervous investors struggling to find a place to hide. Our call a couple of weeks ago to keep some capital in Dollar cash also paid off, as the flight to safety did bring some strength to the global reserve currency.
All of this negativity was brought on by numerous impactful events all happening (more or less) at the same time.
- The Russia-Ukraine war still rages on and, although many talks about a cease-fire have emerged, no evidence of such a development is visible yet.
- The Chinese caused some more angst with their policy towards COVID Regulations and continues to hint at further lockdowns and border closings. In a world where supply-chain issues and heightened product demand are causing inflationary pressures above what was considered by many reserve banks, this will not help in any way.
- But the worst news to come out was the scathing report on global growth forecasts by the IMF. In its World Economic Outlook report, the IMF revised down global growth expectations for 2022 and 2023 down to 3.6% for both years and they argue that over the medium term that decline to about 3.3%. They even warned of stagflation risks in Asia as Asian economies are finding it difficult to manage the inflationary pressures without hurting GDP growth.
We saw a brief downtick in some commodity prices, but given the current state of global affairs, we are still very confident in our overweight to this asset class. With Gold taking a bit of a breather on the back of rising bond yields and the metal commodities (mostly) maintaining the bullish run, the question now becomes “for how long will this last?”. In our view, there is not much adding pressure on the downside and with China causing more supply-chain mayhem and Russia not budging on their war efforts, it seems like this could hold for a while longer.
For the first time in a while, the bad news seems to have hit the SA market as well – in a major way. Throughout, it’s only the property sector that is holding on to some stability after a week of carnage. The strong Rand performance also came under pressure and bond yields responded in a similar fashion.
Together with the global factors mentioned above, South Africa had to deal with even more problems. The floods in KZN are going to have a massive impact on our growth rate and caused government to quickly reopen the recently dormant Relief Fund. Then we had loadshedding rearing its ugly head again and, although for most South Africans this is not a big deal anymore, it still spooked many investors out of our markets.
However, South Africa is still a net benefactor of the commodity price increases and should maintain a trade surplus and tax windfall as long as this continues. Unfortunately, this will only help to a certain extent and even with these positives, the IMF kept our GDP growth forecasts at 1.9% for the foreseeable future.
The ZAR weakness is very much more related to USD strength than SA related concerns – Pound Sterling, Euro and most emerging currencies, especially the Chinese Yuan, devalued dramatically against the USD over the past week. The SA Bond market also held up well in this environment, which is ‘telling’ that the currency carnage is mostly due to USD strength.
We are more cautious at the moment and keeping our 4.0 risk rating for global and 4.0-4.5 risk rating for local assets. Although we cut back some SA Resource exposure in our funds, we remain overweight spot commodities and SA Resources with a neutral allocation to property, while we remain cautious on other risk assets both local and offshore.
LOCAL: 4.0 – 4.5
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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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