What was predicted to be a short meeting turned into a very interesting debate. We went over technicals and saw the downturn in equity markets continue from last week. There was also more strength for the US Dollar on the back of a global risk-off market. The major discussion, however, centered around our prediction of what the FED is going to do on Wednesday and how it will impact markets around the globe. We looked at four possible scenarios and discussed the probability of each. Jacques de Kock provides a summary of this week’s investment meeting below:

 

  1. FED Hike of 25bps – This seems to have a low probability and is not priced in by the market. This option should see a rally in emerging markets (EM) currencies including the ZAR. It should also bode well for equity markets in the short to medium term.
  2. FED Hike of 50bps [With dovish undertones] – Both Roeloff Horne and Gavin Betty lobbied for this option being the most probable, saying that the FED will stick with their “data dependence” theme and kick the can down the road. The view is that the FED will be careful in spooking the market too much, but still needs to come to the party in trying to curb rampant inflation figures. This scenario should still be positive for markets in general, but less so than in scenario 1. This should see emerging market currencies gain back some losses, but probably not strengthen considerably, with the same going for EM equity markets.
  3. FED Hike of 50bps [With hawkish undertones] – Armin Diem and myself were more avid on this scenario. We think that the inflation scare is getting out of hand and that the FED is being pushed into a corner to do something about it. With the general hawkish nature of the feedback in the last month, it will also seems like the FED is not being honest to the market about their intentions if they don’t stick with the rhetoric [but then again, when were they ever completely honest].
  4. FED Hike of 75bps – Strap yourself in, it’s going to be a bumpy ride! Although we think the probability of this option is quite low, it’s still a possibility. This scenario should see a continuation of equity market weakness and US Dollar strength. More risk-off behaviour should follow and renewed pressure on global growth rates could see talks of stagflation becoming more prevalent.

 

Conclusion

Overall, our main theme of “It’s All About The FED” could be used in almost all the scenarios we could think of and just comes to show how fluid and volatile the position is at the moment. Scenario’s 2 and 3 above are by far the most likely outcome and echoes the positions we have created in both our funds and portfolios. We are therefore content with our current positioning and wait to see what happens on Wednesday evening before committing to a specific strategy.

We will send out some more communication if we find that the FED’s decision is something outside of our current framework and that we need to react on within our funds and portfolios. But for now, we remain prudent on risk assets with both global and local risk assets on a 4 risk rating.

 

Risk Score

LOCAL: 4

 

GLOBAL: 4

 

Learn more about our Risk Score

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.

 

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.3 

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