It was another rollercoaster month for risk asset investors. Although most global equity indices ended the month only slightly positive, it felt a lot worse. There was no real “winner” when you look at the figures, with the S&P500 returning 0.13%, the ACWI ex-USA ending the month 0.72% up, and the MSCI EM Index nudging up 0.44% (all in USD terms).

The situation didn’t change much regarding the Russian-Ukraine invasion. Many talks of a peaceful resolution have gone by without action and our base case is that there won’t be a quick end to this. And even if we do see a resolution in the next few months, the effects thereof should still haunt the market for quite some time.

It’s also prevalent how much liquidity is drying up and the effect thereof on prices. We feel that most of the volatility over the last month can be contributed to the fact that the dramatic slowing of QE and the hawkish nature of the FED is causing global liquidity to dry up and any market movement is exaggerated because of it. Unfortunately, the FED had very little choice in their decision to hike rates because of the other big market factor, inflation.

We are still seeing global inflation making headlines for all the wrong reasons. Mostly all the “transitory” advocates are now silent, and we are astutely aware that this could be a part of our lives for quite some time. This is causing the FED (and to some extent the ECB) to think long and hard on any rate decision. Any decision to stimulate growth could see inflation skyrocket out of control and any decision to curb inflation could cause a global stagflation scenario.

Some research reports indicate various ‘chokepoints’ with respect to energy, gas, microchip supplies which could completely derail certain developed market economic growth strategies as well as attempts to move to cleaner energy alternatives. It is clear that the world is not nearly ready to transition to cleaner power, energy and low carbon emission solutions. With this in mind governments can hardly afford ‘higher for longer’ interest rates considering the trillions of Government debt. Just to remind investors the higher bond yields spike up, the more Governments have to pay in interest coupons. The better alternative for Governments is to accept higher for longer inflation due to commodity supply constraints and to opt to stimulate economic growth – especially the US and China – by spending on infrastructure development. The current demand versus supply constraints benefit producers of energy and commodities with long-term supply constraints – all of which are mostly situated in Emerging Markets.

Even without evidence of a global infrastructure spending programme we favour Emerging market value counters. The iShares EM Value Factor Index ETF is trading below book value and on single digit forward PE ratios. These counters trade at a more than 50% discount relative to developed market counters as well as to their own history.  So, the theory is that there should be some value unlocked in Emerging Markets as China opens up its economy in the short-medium term. Commodities are also looking strong and with the world still in limbo with high demand and stinted supply, energy/PGM commodity strength should also continue over the short to medium term. If Central banks follow on with higher interest rates, expensive growth stocks will continue to fall out of favour which could continue the current trend where value stocks outperform growth stocks and investors should certainly tilt portfolios to respect higher yielding dividend, quality growth stocks in Developed Markets, while using the opportunity to slowly expose portfolios to Emerging Market value proxies, if not already exposed.

In South Africa, we saw more devastation for residents in KZN, who just can’t seem to catch a break. This means that more infrastructure spending and financial help will need to be allocated to the region putting more stress on our fiscal situation.

It’s not all doom and gloom though, as we are seeing signs of a slight recovery, even if it is only short term in nature. South African risk assets started the month where they ended in April, on the back foot and heading down. But the last week or so saw a recovery for most counters, culminating in the JSE All Share Index being down only 0.36% for the month of May. The only big detractor was Industrials that ended the month 2.35% in the red. Financials were the clear winners, benefitting most from the interest rate hikes, and ending up 4.30% for the month.

Inflation remains a concern for our local market as well, as we continue to see a rise in fuel and food prices. The government is doing what they can to try and ease the pressure as we go into the third month of a cut in the fuel levy. This is, unfortunately, only a minor relief and we think that the South African consumer still has some though times ahead.

As mentioned above, we still think this provides some unique opportunities to buy into risk assets cheaply. That being said, we are still cautiously positioned and keeping some cash on the side for such opportunities.

Given all the risks involved, we continue to have a more cautious risk-asset exposure in our portfolios. This has two benefits; firstly, it protects our clients’ capital against major drawdowns and, secondly, it provides for flexibility to jump onto opportunities to buy cheap assets. This is becoming increasingly important. Our technical analysis is showing risk assets getting closer to oversold territory and at very attractive prices. As stated, we remain cautious, but will start getting back into riskier positions as and when our process gives us the opportunity to do so.


Jacques De Kock market & portfolio commentary

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. MitonOptimal South Africa (Pty) Limited is an Authorised Financial Services Provider Licence No. 28160, regulated by the Financial Sector Conduct Authority (FSCA) – Registration No. 2005/032750/07.MitonOptimal Portfolio Management (Pty) Limited is an Authorised Financial Services Provider Licence No. 734, regulated by the FSCA – Registration No. 2000/000717/07.

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