March was a turbulent month for global markets and a difficult one for local risk assets. Global risk assets did well in March (in US Dollar terms) despite the US Dollar being heavily on the back foot. Both developed and emerging markets gained in March ending month up 3.09% (MSCI World Index) and 3.03% (MSCI EM Index) respectively, all in US Dollar terms. This came even with the scare in the banking sector and renewed talks of a global recession on the way.
This made the job of the FED rather difficult. On the one hand, inflation is not quite under control yet and any negative influence could see a reversal on all the good work that’s been done. On the other hand, economic pressures, contagion in the banking sector and GDP growth are weighing heavily on the rate decision. This was probably the reason why we saw a 25bps hike instead of a 50bps hike in March. The effect of this decision is still unknown and could cause the hawkish nature of the FED to continue a little longer than expected.
On the positive end, it seems like China is opening their economy quicker and with a more stable outlook than previously expected. This helped some emerging market economies and should be even more of a positive factor for as long as it stays open. This caused most equity markets to look bullish in the short term, some, like the Nasdaq 500, are still in overbought territory. The caveat is that the world, and with it the economic landscape, has changed. The developed world has more options available to them to combat economic slowdown and to stimulate growth, where emerging markets need external factors, in addition to their own economic policy,to go their way. This means that valuation metrices and historic averages might not be a good indication of relative under- or over-valuation. Where an emerging market economy might have had a historic average P/E of 10 to 12 and a GDP growth rate of 6% the new average to consider could be much lower – with the inverse for a developed market economy. These factors make it difficult to allocate capital in a perfectly efficient manner.
On the local side, it was a bit more difficult to get positive returns in March. The JSE All Share Index ended 1.26% down for the month with Financials (-5.77%) and Listed Property (-3.39%) causing most of the damage. The end of the month did see a reprieve for local risk assets that we feel is set to continue in the short term, but there are still many risk factors to consider before being more bullish on SA risk assets. With loadshedding putting immense pressure on our economy and causing inflation to be much stickier than expected, it’s putting a lot of pressure on the SARB as well. We also saw the ZAR strengthen in March, which would generally be a good sign, but in these circumstances just reduced the positive returns from offshore assets to basically nothing [MSCI World Index did –0.36% for the month in ZAR terms].
The performance of the portfolios has benefitted from the underweight in South African risk assets as well as offshore assets. We are seeing a general move from SA risk assets to global risk assets from our underlying managers (over the last 3 months) which complements our view. Overall, we are still comfortable with our conservative stance. We are slightly underweight risk assets, but looking to go to neutral allocation when the time is right.
Jacques de Kock
Quantitative Analyst & Portfolio Manager
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