MEETING PURPOSE
Our investment team aim to meet every week to discuss the macro environment and how this could impact our current and future portfolio construction.
KEY TAKEAWAYS
- Market at a Critical Juncture: Global equities are testing key support levels after a recent pullback.
- Shift to Active Management: The market is transitioning from a broad index rally to a stock-picker’s market. This is driven by AI-fuelled divergence (clear winners/losers) and a rotation from US tech to non-US and EM equities.
- Offshore Fund Actions: The offshore fund’s equity allocation was increased to 71% (from 60%) during the pullback, adding to iShares EM Value ETF, Han-Gins Megatrend Equally Weighted Technology ETF, Jupiter World
- Equity and the Orbis Balanced Fund. Cash was reduced from 17% to 7%.
TOPICS
Market Outlook Strategy
Consensus: The recent pullback was a healthy correction, not a bear market signal.
Bull Market Drivers Remain Intact:
- Lowering Rates: The Fed’s trend is down, a key support for equities.
- Contained Inflation: Lower energy prices and AI’s impact on wage demands are keeping inflation in check.
- Robust Corporate Earnings: Q3 results were strong, with forward EPS upgrades becoming more widespread.
- Corporate Buybacks: ~$1.6T in buybacks provides a constant source of demand.
- Market Divergence: The “K-shaped” recovery is widening, with the top 10% of US earners now accounting for 50% of consumption. This divergence creates clear winners and losers.
Active Management: This environment favors active managers who can identify winners (e.g., Alphabet, Tesla) and avoid losers (e.g., Meta). The offshore portfolio’s shift from 100% indexation to 50% active has already created alpha.
Technical Analysis and Key Levels
Global Equities: Most indices (MSCI World, S&P 500, Nikkei) are testing support after a pullback.
Bitcoin’s ~60-day lead on equities makes its recent bounce from support, a key indicator.
Actionable Levels:
- Buy the Dip: If support holds, this is a tactical opportunity to deploy cash.
- Risk-Off Trigger: A break below support would signal a major risk event.
- SA Equities: The Top 40 and All-Share indices are consolidating. Resi (Resources) has outperformed, while Industrials and Financials are holding bullish trends.
Yield Curves and Bonds
Steepening Yield Curves: A suspected trend across major economies (US, EU, JP).
- Drivers: Global Policy rates pressured down at the short end; funding demand for long term debt at the long end. SA Repo Rate cut by 0.25% to 6.75%. Despite lower yields in SA, it remains attractive when inflation remains low below 4%. A real yield of 3-4% is available to SA investors in short end of the SA fixed interest market.
- SA Fixed Interest: The recent bond market rally has run its course. The upside for returns over the next 12 months appears limited.
- Cartesian Engagement: The team will invite Cartesian for monthly yield curve analysis to gain expert insight.
Commodities & Correlation
- Oil: JP Morgan forecasts oil in the $30s within 2-3 years, citing increased supply from non-OPEC sources and improved fracking technology.
- Gold: The price has hit its technical target and is consolidating. High trading volumes are driven by retail investors (40% of turnover) and new bank trading desks.
- Correlation Challenge: The financialisation of commodities and private assets makes finding non-correlated assets difficult.
- Jeffrey Gundlach’s View: Private credit/equity is highly correlated to public markets; the low volatility is an illusion created by valuation methods.
Offshore Portfolio Update
The Orbis Balance Fund (now 7% of the fund).
Positioning:
- US Equity: 33% (vs. 42% neutral) → Underweight
- Non-US Equity: 22% (vs. 18% neutral) → Overweight
- EM Equity: 16% (vs. 16% neutral) → Neutral
- Future Action: May add 1-2% more to EM and nibble at the Han-Gins Megatrend Tech ETF.
Local Portfolio Update
- Positioning: Overweight SA equity, neutral on property, and marginally overweight global equity.
- Risk Score: Portfolios are above neutral (5.5-6), reflecting an overweight to risk assets.
- Recent Activity: Redeemed a small portion of SA Inc. equity (~1-1.5%) to manage seasonal outflows.
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