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 Shift: The Middle East conflict has triggered a market regime shift. Equities are entering a distribution phase (sell rallies, don’t buy dips), while commodities (energy, agriculture) are the only diversifier, with fuel oil prices now higher than in the 2008 crisis.
- Strategic Response: The offshore fund’s equity exposure was cut from ~70% to ~56% to reduce risk. The portfolio now balances a “barbell” of US tech and basic materials, with new weights in global infrastructure/energy. We also reduced risk assets in our local funds and are now underweight our SA Equity neutral with a significant overweight in SA short-dated fixed interest and more US dollar cash exposure.
- Conflicting Views: Major research houses offer divergent views. Alpine Macro and BlackRock are constructive on US assets, while Stanlib warns of asymmetric left-tail risk and a “hawkish hiccup” scenario (35% probability).
- SA Outlook: South Africa’s “Goldilocks” scenario is on hold. A persistent conflict (4–6 weeks) could delay rate cuts, cap consumption, and reduce 2026 GDP growth by 50 bps.
TOPICS
Market Impact of the Middle East Conflict
- Fuel Supply Bottleneck: China’s cancellation of refined fuel exports creates a critical bottleneck, as crude oil is useless without refining capacity.
- Ripple Effects: Fuel oil prices are at all-time highs, exceeding 2008 crisis levels. This directly impacts global trade, where logistics costs can be 5 times the commodity price (e.g., manganese ore).
- Geopolitical Risk: The conflict’s duration and the control of the Strait of Hormuz are the key variables. A prolonged conflict increases the risk of escalation.
- US Position: The US is a net energy exporter, benefiting from higher prices. This creates a domestic divergence between energy producers (winners) and consumers (losers).
Asset Class Performance & Technicals
- Equities: Global indices are showing distribution patterns, suggesting a “sell the rally” environment.
- Bonds: Yield curves have shifted up. French and German bonds are vulnerable to a bearish break.
- Commodities: Energy and agriculture are outperforming. Precious metals (gold, platinum) are showing distribution patterns and need to hold support levels.
- Currencies: The US Dollar Index (DXY) is testing the 100 level. A break above 110 would signal a major bullish trend.
Research House Perspective
- Alpine Macro:
- Oil: $130/barrel is the tipping point for the global economy. Any further escalation may add to market stress, especially if it drags on another two weeks.
- US Assets: Treat as defensive legs; stay constructive on bonds.
- Europe: Underweight German equities due to structural drag.
- BlackRock:
- US Equities: Preferred due to the AI theme.
- Diversification: Gold and government bonds have not provided short term diversification.
- Cash the only alternative
- Infrastructure: Positive long term outlook.
- Stanlib:
- Regime Shift: The team moved from viewing events as “noise” to protecting against “asymmetric left-tail downside.”
- Liquidity: Rate of change in global liquidity is turning negative, a key risk indicator.
- Scenario Probabilities: “Hawkish Hiccup” is their new base case (35%), with “All Fall Down” rising to 18% (from 4% in Q4 2025).
Discussion and Debate
- Barbell Approach: The team affirmed the strategy of balancing US growth/tech with basic materials/value.
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