The discussions this week centred around the prevailing feeling of uncertainty in global markets, especially when listening to presentations held in London. Global recession fears are quickly becoming a reality and coupled with higher inflation numbers, are painting a rather grey picture. Putin also showed his hand with some very strategic attacks in populated areas in the Ukraine, showing that he has no intention of backing off anytime soon. Then comes the energy and oil debacle with supply issues, political embargoes and continued demand keeping prices elevated. Jacques de Kock provides a summary of this week’s investment meeting below:
The week saw more weakness in equity markets around the globe with only China continuing a strong trend. The US Dollar also remains strong as markets stay risk-off with everyone looking for a “safe place” to hide. The 10 year bond figures are looking a bit stronger this week, especially for G7 countries. As Roeloff mentioned, the only positive commentators at the London conferences seem to be the fixed income traders that, for the first time in quite a while, have some yield to work with. The recent developments in the Ukraine were also discussed extensively this week, with ‘guestimates’ on what Putin’s next move could possibly be.
Although it will only be exactly that, guestimates, one thing that is abundantly clear is that he is not stopping anytime soon. The implications of this are that, as has been our base case for quite a while now, this war is probably going to be a much longer affair than many people may have thought. And every day that Putin pushes forth, the chance of a retreat becomes less and less. This means that supply issues, especially with energy and food shortages, are not going away anytime soon. On a positive note (yes, luckily, it’s not all doom and gloom), some key inflation figures are looking to have made a turning point:
Source: Anchor Stockbrokers
This does not mean that the FED is out of the woods yet (not by a long shot) and the ECB is probably far from reaching their inflationary tipping point, but at least it looks like there are some silver linings.
The main theme running through most of our conversations this weak was the risk of geopolitical and monetary policy miscalculation. In our view, the worst thing that policy makers can do now is to downplay the situation. It is important that policy makers act decisively and with conviction. Yes, it might be hard for most consumers to stomach rapidly rising interest rates combined with high inflation, but it’s probably what’s needed right now.
The same can be said for our local policy makers. The loadshedding situation is causing massive disruptions with crushing effects on forecasted GDP figures. Although our outlook on inflation is less severe than our developed market counterparts, we are still looking at anything from 75bps to 125bps in hikes until the end of the year.
With more uncertainty coming on, we are more convinced of our conservative approach in our funds and portfolios. We stay at risk score 3.5 for both local and global risk assets with the option to move to up or down by 0.5 if weakness or opportunity should arise. We feel that being conservative in these uncertain times is going to benefit us in the medium-term as we will have more capacity to buy in on low valuations when the time is right.
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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