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
- Strategy: Adopt a “wait and see” approach and hold cash. This provides a buffer to react to the next major market move (e.g., an 8% swing) without incurring high hedging costs.
- Market Standoff: Global markets are at a critical juncture, with indices at resistance levels and awaiting a resolution to geopolitical tensions. The next 2–3 weeks are crucial for determining the market’s direction.
- SA Vulnerability: South Africa faces severe inflationary pressure from rising fuel costs, compounded by dangerously low strategic reserves (20 days vs. a 60-day legal minimum). This creates a difficult policy choice for the SARB.
- Future Target allocations: We target two areas for potential additions:
Old Mutual RAFI global equity index and the iShares EM Value factor ETF – both aligned with Alpine Macro’s sector views (Industrials, IT, Healthcare, Energy).
TOPICS
Geopolitical and Macro Backdrop
- Market Standoff: Global markets are poised at resistance levels, awaiting a resolution to geopolitical tensions.
- Rationale: The next 2–3 weeks are critical. A negotiated settlement could see oil prices stabilize around $90/bbl, while further escalation (e.g., targeting infrastructure) could push prices to $150/bbl, triggering a recession.
- Impact: This uncertainty makes a “wait and see” strategy prudent.
- SA Fuel Crisis: South Africa faces a significant inflationary shock.
- Mechanism: The monthly fuel price is set by averaging the prior month’s imported price. The current month’s average is already far higher, signalling a large increase for the next reset.
- Policy Dilemma: The SARB must decide whether to “look through” this temporary shock or raise rates to manage imported inflation and potential union wage demands.
- Alpine Macro Downgrade: Alpine Macro downgraded South African equities from overweight to underweight, bypassing a neutral rating based on the following rationale:
South Africa ranks poorly on our vulnerability score; its inflation outlook is particularly sensitive to global commodity prices and exchange rate volatility.
Market Technicals and Sector Analysis
- Global Indices: Most major indices are at resistance levels, with a bearish bias.
- MSCI World: Bounce stalled at formidable overhead resistance.
- US Indices (S&P, NASDAQ, Dow): Show weak bounces and bearish distribution patterns.
- Russell 2000: Still selling off, settling into a lower range.
- Nikkei: Bearish head-and-shoulders pattern forming.
- FTSE: The strongest performer, driven by resources exposure.
- Bonds: Bearish breaks in US, EU and Japanese bonds are retesting their trend lines. The next move will confirm if these were false breaks or the start of a deeper decline.
- Commodities:
- Energy: The strongest sector, driven by oil, coal, and shipping fuel, which is at an all-time high.
- Industrial Metals: Aluminium is up 50% (from $2,400 to $3,600), benefiting from supply choke points.
- Precious Metals: Mixed performance.
- Gold: Building a base, holding support at $4,700.
- Palladium: At a critical retest level; a failure would invalidate its recent bullish move.
- Platinum: Needs to break above $2,000 to regain momentum.
- Bitcoin: Bearish head-and-shoulders patterns suggest potential downside to $35,000.
Portfolio Strategy and Future Targets
- Future Targets:
- RAFI Global Equity Index: An index aligned with Alpine Macro’s favoured sectors (Industrials, IT, Healthcare, Energy).
- EM Value Factor ETF: This ETF is well-positioned, with strong holdings in semiconductors (Korea) and resource-heavy markets (Brazil).
Next Steps
- Maintain a “wait and see” strategy with a cash buffer.
- Take profits from the recent bounce to reduce risk.
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