This week’s investment meeting centered around inflation – following the ‘much worse than expected’ inflation numbers out of the US. The team unpacked possible responses from the Fed, and what impacts these could have on markets, especially here in SA. With SA inflation seemingly under control the team is seeing some positive signs for SA and EM risk assets, but remain cautious for now. Jacques de Kock provides a summary of this week’s investment meeting below:
IT’S ALL ABOUT THE FED… AGAIN
Unfortunately, it seems like last week’s signs of recovery were rather short lived. Although the week started off on a positive, it took a turn for the worst after the US inflation numbers came in much worse than expected at 8.6%. It was previously thought that the US might be at a turning point and that core inflation should be under control, but the latest figures say otherwise.
This should force the FED into a difficult space where it might be necessary to go much more hawkish than they would like to be at the next rate meeting. Although it is not certain what the FED will do, what is certain is the market’s reaction since last week Thursday. With global equity and bond markets taking a heavy beating, it seemed like the only hiding place was in holding US Dollar cash.
Going through our short term technicals this week, it was difficult to find a silver lining with most indices breaking through (or close to breaking through) previous resistance levels. As stated last week, it’s a bit early to say if the fall will be extended or if it’s just an overreaction to the inflation numbers, so the recurring theme of “It’s all about the FED” is still alive and well.
Armin Diem described it well in this week’s meeting stating that a lot of signals and measures that get used to determine South African asset prices are extremely reliant on factors linked to the US (and some other Developed Markets). And with inflation at 40-year highs, the FED’s next move should have a drastic impact on, not only South Africa, but most Emerging Market economies.
On the flipside of this is the opportunities it creates. Some market participants are seeing SA inflation becoming more stable over the next 12 months and leveling out within the target range. This should mean a more favourable outlook on risk assets versus what is being priced in at the moment. There are many instances of equity counters sitting on very attractive dividend yields and very low PE multiples, providing for great opportunities. The only question is whether now is the time to jump on the opportunity or if one should be a little more cautious about the timing.
Our opinion is that it is still too early to call the move and it will be prudent to stay cautious and protect capital as much as possible. The extent of the next FED rate hike as well as the general tone they have towards future hikes, should be a good indication of what we can expect going forward. But for now we remain cautious.
Risk Score
LOCAL: 4
GLOBAL: 4
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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
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