Signals are much more bullish after the week’s upward trend. It’s still very short term in nature and difficult to ascertain if this is a change in trend or just a minor correction with more bearish moves to follow. We observed USD short-term weakness this week, but once again, it’s difficult to predict the longer-term trend from this week’s market action. Similar to the global trends, our local market also had a good week. Although it’s still too early to call massive buy signals the short-term technicals are showing some positivity. The ZAR is showing some strength versus the USD and the major European currencies but it is flat versus the rest. In these fluid times, there are many factors to keep in mind. We spent most of the meeting discussing and debating three possible scenarios that will influence our allocation to risk assets: The “Good”, the “Bad” and the “Somewhere In Between”. 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. SCENARIO 1: THE GOOD

In this scenario, we discussed the effects and market movements that would have a positive impact on global risk assets. There are many more cases that could be discussed, but the main factors include:

  • Oil price pressure recedes and commodity prices lower to more sustainable levels
  • The Chinese stimulate more aggressively and ignite faster economic recovery
  • Global hike in infrastructure spending combined with investment into “Green Energy”
  • Russia – Ukraine tension eases causing EM recovery
  • Commodity “Chokepoint” scenarios ignite QE “Infinity”
  • FED pauses / becomes more dovish

These factors would each contribute to a more positive outlook on risk assets globally and are some of the flags we would use to gauge market sentiment. Some of them are more (or less) likely than others, but it’s highly unlikely that all would happen at the same time.

 

2. SCENARIO 2: THE BAD

These are the factors we would use as indicators for a reduction in risk assets:

  • Higher inflation / higher oil price / possible food shortages
  • Slow China recovery and a more hawkish FED
  • Supply/demand dynamics for PGMs deteriorate due to slower economic growth
  • EM countries are forced to hike rates even further with commodity demand waning
  • Stagflation scenario ensues

As with scenario 1, these factors have various probabilities but it’s unlikely they will be linked or that they will happen at the same time.

 

2. SCENARIO 3: THE SOMEWHERE-IN-BETWEEN

This is the more likely scenario with some of the factors in each of the scenarios playing out. It’s still too early to say how much each factor would influence the sentiment toward risk assets, but we think it’s important to try and adjust portfolios to try and have a “foot in each camp”.

 

Conclusion

We stay cautious on risk assets. With volatility at such a high level, it’s just too difficult to call the bear case just yet. We will still hold the assets that we think contain some value and continue looking for more opportunities as they arise. We think jumping on a specific band wagon holds too much risk in the short-term and preserving our clients’ capital remains our main priority.

 

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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