You would be forgiven for thinking that we are just rehashing our previous week’s summary one week after the other. It almost feels the same to us too. And as much as we would like the tone to change (and believe me, we do), unfortunately it’s much of the same this week. Luckily, we do see “green shoots” popping up in some areas. Jacques de Kock provides a summary of this week’s investment meeting below:
From a technical perspective, equity indices are still quite bullish. The week saw a tick up in some areas, but not enough to change signals from the bear to the bull. The week did see the USA 10Yr Bond Yield turning bullish though, with the US Dollar continuing a position of strength. There was also lots of talk in the media on the US Dollar edging towards parity with the Euro. This is a significant development and could play out in any direction, but a strong US Dollar is generally not good for Emerging market equities. The next market move will be on the back of earnings season in the US. The consensus is that most of the company reports are going to disappoint, but hopefully that pushes the expectations low enough that the market reaction is less severe.
On the local front, it’s once again more of the same. The bears continue to roam throughout most of our analysis, but like the global outlook, there are some positive signs. Naspers and Prosus continue the strong performance of last week, pushing the Industrial index into bullish territory. The property sector is also on a bit of a bullish trend, but we think it’s a bit early to start buying in just yet. The strong performance of the US Dollar and the relative ZAR weakness also culminated with our bonds staying in bearish territory, with the R186 on a yield of over 9%.
As I stated earlier, our meeting started off as another stuck record, but luckily that is not the end of the story. There were also some positives to take out of the current economic environment. It seems like the oil price is finally coming down and ended the week below $105 per barrel. The price reduction in soft commodities could also have an influence on future inflation as input costs should subside (although not by much). At the time of writing (Wednesday 13th) the US inflation print was just announced and once again surprised on the upside. This should cause more angst as the expectation of more FED hawkishness is now almost a certainty. We do feel, however, that we could be close to the top for US inflation and that the FED’s effort should start paying off in the next few months. We also expect supply chain problems to ease off through 2023 (or hopefully sooner) as more product suppliers come out of COVID induced lockdowns.
The question, however, is WHEN this will all unfold. We would venture to say that it is a question of “when” rather than “if” given all the factors at play. For the moment, we are still seeing a possible down leg from here, not just for the US, but probably throughout the global markets. A recession is almost a certainty now (especially after today’s inflation print), but we think that the extent thereof could be ‘less deep’ than some market participants are advocating.
All-in-all we are still bearish risk assets for the foreseeable future. Too many factors are putting pressure on the global markets and driving inflation fears are causing us to remain cautious. We expect this still be the case until probably early 2023, unless some unforeseen “good news” hits our news centers. With that in mind, our risk score for both local and global assets remains at 3.5. During our quarterly feedback session, 36ONE Asset Management fund manager, Evan Walker, articulated our views quite well in saying that being cautious now is not only a risk mitigator, but also creates opportunity to buy in when the tide turns.
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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