It was another week of risk-off behaviour in global markets. Although we saw a slight bounce back for most indexes, it’s still mostly bears roaming throughout our technical analysis charts. Also continuing its form of the last month; the US Dollar remains in a position of strength versus most other currencies. This makes sense given the hawkish nature of the FEDs latest rate hike. It’s a similar story for the local market, with a lot of bears throughout including more ZAR weakness. Jacques de Kock provides a summary of this week’s investment meeting below:
The main conversations for the week centered around the possible continuation of the global bear market and if (or rather when) we should be looking to turn up our risk allocation again. There are various factors at play, but the main discussions focus on the following:
1. Global Liquidity – this is one of the main factors that we use to determine risk allocation within our risk score analysis. Liquidity explains most of the recovery in performance after the March 2020 shock and, in the same way, explains a lot of the risk-off behaviour now. The graph below shows just how much liquidity has dried up globally:
Source: CrossBorder Capital
This implies that valuations may become stretched as pressure mounts on investors that could find it difficult to sell out of certain counters. We see this as a big concern that could push some equity markets (including the US) into a recession.
2. US and Global Inflationary Pressures (and Recessionary Threats) – The FED is feeling the heat of staying behind the curve for as long as they have and might have pushed themselves into a corner.
At the moment, we are still of the opinion that they have control over the situation, but they will have to manage policy and public opinion very well from here on. Unfortunately, the US jobs-workers gap of 5.6 million (jobs available) is pushing up wage inflation and that could derail the FEDs plans. And this takes us to (probably) the most important factor…
3. The FED – in our last note we coined the theme “It’s all about the FED”, and that very much still applies. If the FED is pushed too far and feels that they need to become excessively hawkish, we could see a global recession with many casualties in its wake – most of which will be emerging market countries. But on the other side of the coin, if we see inflation improving and the FED look more dovish, the opposite is very probable. The point is; the variance of outcomes is very wide and it’s all hinging on the decision of one institution – “With great power comes great responsibility”.
We are still concerned about where the bottom of this bear market could be and therefore we are still cautiously allocated to risk assets. The possibility of picking up cheap assets is, however, becoming more and more prevalent as time goes on. So whilst we remain at risk score 4 for both local and global assets, we are keenly observing the market for opportunities and will pounce when appropriate.
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.
Learn more about our Risk Score
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