July was a good month for risk assets in general. We saw some positive signs after months of risk-off behaviour and markets responded accordingly. The Nasdaq saw its best month since 2020, gaining 12.2% during July.
From a global perspective, the world is still in a state of flux with geopolitics and supply chain shortages continuing to damper economic growth and pushing inflation fears higher. This played a major role in the FED raising interest rates by another 75bps. This was, however, taken favourably by the market as the more dovish undertone and decisive action instilled some confidence in the FED’s capabilities to engineer a soft landing through this difficult period. On the other side of the world, we also saw the ECB hike rates for the first time in more than 11 years, showing that the pressure of inflation is also causing massive concern in addition to the ongoing war in Ukraine.
There is seemly also no end in sight for Putin’s eagerness to conquer Ukraine for Russia. This is making life difficult for most European countries depending on Russia for gas supply. This means that many countries will have to face the coming winter season with a major shortage in their main supply of energy. All of the above-mentioned scenarios are contributing in a big way towards many countries looking to internalise production and manufacturing of the products they need to run their economy. This shift in protectionism is just one of five scenarios that we in the Investment Team are focused on currently.
Our view is that the world very different now when compared to the years from 2009 to 2021:
- Global Liquidity: In the past decade we saw massive amounts of monetary stimulus being pumped into the global economy. This created high liquidity within markets and provided support for global risk assets. Unfortunately, the negative effect of this was higher inflation which was almost inevitable after the war in Ukraine caused even more disruption. Now we see a world where liquidity is quickly drying up, with central banks doing everything they can to curb rampant inflation.
- Interest Rates: The previous decade saw interest rates drop lower than they have been for a very long time, with some countries going into the negative territory for the first time ever. This is all reversing quickly with many central banks back to pre-2020 levels. This could continue with a possibility that central banks will hike even higher if inflation does not come down within the next 6 to 12 months.
- Global Inflation: Inflation will probably be elevated for longer than many market participants are predicting. The previous decade was one of average to low levels of inflation, but with massive stimulus and increasing liquidity something had to give. Although we see inflation coming down in the next 12 months, we feel that will remain higher than compared to the previous ten years.
- Geopolitical fear: It’s difficult to say how and when the war in Ukraine will end. But what we do know is that the effects thereof will remain in the system for quite some time. The scars of war and political actions will be evident in global politics for long after the war is done, putting pressure on free trade and globalisation.
- From Globalisation to Protectionism: Increasingly countries are looking to internalise many of their economic resources and activities, in an effort to be less reliant of others. This is a direct effect of geopolitical scars caused throughout the Covid pandemic and the war in Ukraine. Unfortunately, we don’t see this relaxing soon and could possibly worsen if the current state of the world takes longer to heal.
Locally, we also had a good month with the JSE All Share Index jumping 2.5% in July. This was in part because of the Industrial sector returning 4.2% and listed property ending 7% higher for the month. The resources sector was the only major sector coming in lower at month end returning -0.9% for July.
The SARB also did their part in trying to curb inflation, that is now sitting at 7.4%, by hiking interest rates by 75 basis points. This is putting a great deal of pressure on consumers that are already struggling. Loadshedding also reared its ugly head again causing disruption throughout the country.
With all of the pressures on the local and global market and most factors still pointing to market drawdowns, the portfolios benefited from our conservative positioning. Unfortunately, July had more risk-on events and the market rallied thereafter. Although the portfolios still captured some of the upside, it was less evident when compared to some of our peers. We are, however, not convinced that the market has turned just yet and are still conservatively positioned going into August.
This is mostly because of the market pressures still being very evident, but also because we want to able to jump on opportunities that should arise from pressure on risk assets. Through our technical and fundamental analysis, we keep on looking for opportunities to add relatively cheap assets to our portfolios, but until that happens, we will remain cautious.
Jacques de Kock
Quantitative Analyst & Portfolio Manager
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