During this month, we attended various asset manager presentations in London as well as the Citywire Conference at Fancourt. Many views were shared and collectively we had exposure to more than 40 manager presentations over two weeks. Following the last two weeks, a few things are clear; there is a large dispersion of manager views and that means that it is no easy time to be managing money. Additionally, using past performance to conclude a portfolio for a client will be an extremely hazardous exercise. Our conviction on this statement is that asset class, sector, fixed interest, themes and security selection will be very different relative to any time post the global financial crisis in 2008/9. This is due to fast changing global economic conditions, with the main cause being too much developed economy fiscal and monetary stimulus and the Russian/Ukraine crisis, which culminated into higher global inflation, higher interest rates, less global liquidity injections, increased economic protectionism, a global energy/gas supply constraint and a serious food/wheat supply shock which is likely to present itself before the end of the year. Within 2 years, the world has moved from a fear of infection to the fear of inflation, while financial markets have moved from abundance to scarcity in the space of the last 4 months with very little resolve in sight at present.

The good news is that volatility brings opportunity and that we, as well as 80% of our underlying managers, have managed money before and after the global financial crisis. You are in safe and experienced hands.

Global markets remained volatile this week as growth and inflationary concerns continue to wreak havoc. This sparked conversations about when rather than if a global recession is on the cards. Jerome Powell (FED chairman) did not help sentiment when he admitted to the US Senate that a recession is a “possibility” and that it will be “very challenging” to achieve a soft landing…and we agree. From a technical perspective, the bear market is continuing to tread through global markets, albeit in a rather “orderly fashion”, as described by our commodities specialist, Andy Pfaff.

On the local front, our energy / Eskom crisis is now at stage 6 and remains a high concern for SA economic growth dynamics. One stand out for the week was Naspers and that’s also where our conversations started. With Naspers/Prosus making a 180 degree turn and announcing the start of an open-ended share repurchase plan funded by regularly selling small numbers of Tencent shares (a 29% stake at present). The plan will be active as long as the discount to NAV is at elevated levels. The market viewed this decision very favourably with Naspers jumping more than 20% on the day. In our view, the value unlock has worked and the discount to NAV that’s now inherent in the share price seems fair. That said, we don’t think it’s a screaming buy, nor a conviction sell, but rather a “hold till the trend emerges”.

But, in summary, the main themes and talking points for the month are as follows:

  • Fixed Interest – Global fixed interest managers are looking more positive now that they have some yield to buy although, it’s still a very uncertain area as interest rates could move higher especially in the developed market space compared to other asset classes.
  • Demographic Issues – Each country/area has its own challenges and benefits with inflation having various effects across the globe. Most market participants are saying that the US has reached the top of their inflation cycle now (we are not holding our breath though) whereas, there is probably still some pain to come for Europe.
  • Debt Issues – The world is swamped with debt and could cause major disruptions if not handled with care. Higher interest rates mean a higher coupon payment and governments must be able to service it. Maybe that means that the FED may actually need to cut interest rates if the inflation rate moves lower to 3-4% p.a. Once again, many  countries are not as badly affected by this phenomenon versus other countries (emerging market countries are generally not largely behind the curve). It depends on the debt currency as well as the debt financing abilities of each country, but, in general, the world is in a rather tough spot.
  • Technological Disruption – Many themes play out in this category from advancements in machine learning, AI, medical advancements etc. The growth in this space has been phenomenal and although costs are also rising, the demand for new and innovative products and services just keeps going up.
  • Rise of China and Japan – Quite a few managers spoke about this theme. With comments like “ChiMerica is broken”, “the Rise of China” and “Japan – share holder value unlock”.
  • Deglobalization and Protectionism – In our view this theme cannot be overstated. In a world that was heading for more open policies and complete ease of trade, what is happening now, is a quick  turnaround. We are seeing more and more countries looking to internalise their economies and wanting to distance from a reliance on foreign products. The long-term effects of this movement are still unknown and will most certainly benefit some at the cost of others. But for now, we are keeping this in mind when considering the impacts of new policies and their effect on our asset allocation decisions.
  • Global Infrastructure – To assist economies to enable energy transition, infrastructure investment is critical to a more sustainable future in SA, emerging markets and now, more importantly, developed economies. Although our portfolios have indirect exposure to this theme, we will add to listed, liquid infrastructure options via active funds and index exposure as soon as the elevated pricing in these counters becomes more attractive.
  • Climate Change – Lastly and probably the most important theme is climate change. We, as inhabitants of this planet, cannot continue with the ways of the past. It’s crucial that we rethink not only our consumption, but also the way in which we create (generate) the products and services we consume. As an industry (asset managers and investors) we have a chance to make a change in the way we invest and in the way we create change within the companies we invest in.

 

At MitonOptimal, we believe that the future of investing is heavily reliant on a sustainable framework and that we as asset managers should act as agents to enforce this. Where we can, through sustainability themed investing, voting proxies or whatever means possible we are committed to this idea and will encourage our clients and peers to do the same.

From a risk score perspective, we are still conservatively positioned with local and global risk scores at 3.5. We are in a very negative political cycle at present, both locally and globally (although we believe we have much bigger internal and geopolitical challenges globally versus what we have in SA) with many independent commentators who presented in London believing that the risk of geopolitical miscalculation is high.

Because of this, we are underweight all risk asset classes at present, which should serve us well as the one thing you can be certain of in these market conditions is that “markets always over-react on positive and negative news”. This creates volatility and normally creates the opportunity to invest at much cheaper prices relative to any other time in the past two years. We expect the market to continue to be volatile due to the uncertainty of the Russian/Ukraine situation and how it impacts energy, gas, food and supply and demand concerns globally. All this leads to slower economic growth in the short term and our view is that the market has priced in most of the bad news to date. We believe that the market trades closer to its bottom than its top, so we will keep our options open and will wait for the right opportunities to benefit from these reduced asset prices.

It’s important to remember that “successful investors buy low and sell when markets are high”.

 

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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