The month of October saw most of the market take a well-received breather from the bearish trend of the preceding months. While there are still many factors at play and many scenarios that could cause a further sell-off in the global markets, it’s encouraging to see investors taking on some risk again. From a global perspective, it seems like the inflation monster is settling down, although maybe a bit slower for some countries versus others. Although it was expected that the Fed would hike rates (again) by 75bps, the hawkish tone that followed was not. Luckily the market didn’t take that as a sign of pessimism and maybe equated it more to a hard stance that the Fed will do what is necessary to curb inflation to a manageable level.
Other market moving events this month included a bit of a market fallout after China’s governing party conference and the arrival of Rishi Sunak as Britain’s next prime minister. If the latter is going to have a positive effect on the UK’s woeful situation it is yet to be seen, but at least the market seems to think it will. In China, President Xi Jinping’s move to stack his leadership ranks with those in his favour was not accepted well by markets at all, causing China’s Yuan to plummet to new lows. Unfortunately, as one might have guessed, this also had a negative impact on technology stocks, causing a tumble to the levels we haven’t seen since the Global Financial Crisis.
Overall, October saw investors adding back some risk, as the market bounced from the lows in September. The S&P 500 was the main benefactor of this risk-on trade returning 8.06% versus the MSCI World Index jumping 7.18% and the MSCI ACWI Index returning 6.03%. The MSCI EM Index, however, ended the month on -3.10%, mainly because of the Chinese influence. (All returns mentioned are in US Dollar terms).
In the local market, we saw similar trends to our global counterparts. Inflation seems to be relatively under control and the SARB continued its hawkish stance. Loadshedding was once again a major thorn in the side of productivity for most of the month, but luckily subsided in the last two weeks. There were also some positives as the recent MTBS paved the way for some renewed optimism, although many saw it as another set of empty forecasts and promises. The market in general saw it as a positive though.
This, and the general risk-on environment at the end of the month, helped the FTSE/JSE All Share end the month 4.89% in the green, with the SA Property Index jumping 10.97% and the All Bond Index returning 1.07%. The main contributor to the All Share Index jump was in the Financial Sector, which gained 13.74% in the month. (All returns mentioned are in ZAR terms).
With all the different factors and scenarios that could play out, it’s rather difficult to try and make sense of where we are and what to expect going forward. To try and solve for this, we looked at elements in the market which are ‘different’ to the era we are in now versus pre-global financial crisis. These elements are what we call ‘known known’s’.
Firstly, during the Global Financial Crisis in 2007-2009, we mainly experienced a banking crisis which included a consumer credit / housing crisis in some developed markets and China. What we are experiencing now is different in that we are now past a 12-year period of low interest rates, fiscal and liquidity stimulus and are facing higher global interest rates, no liquidity support to banks/financial markets by Central Banks and much higher inflation relative to any time in the past 40 years in global developed markets. Most Emerging markets and SA capital markets are conditioned to face low liquidity support, higher inflation, and interest rates but not the developed market consumer.
The second scenario differentiation is the challenge of scarcity. We now face an energy crisis in Europe and a political imbalance in terms of oil supply as OPEC is cutting back production in ‘anticipation’ of receding global economic growth and consumption. We also face scarcity in a number of commodities needed to transition to lower carbon emissions into the future. The Central Banks are potentially fighting inflation in the wrong manner by hiking rates to slow down consumption. The bigger issue is scarcity of resources to drive economies. It needs capital investment, improved productivity and incentivization of the private sector to address our structural headwinds in Europe, the UK, some emerging markets, and South Africa to supply energy, gas and other resources required to stabilize economic consumption in a climate friendly manner. This second scenario differentiation includes the move away from globalization – which meant cheaper labour and a deflationary force- to protectionism. Protectionism can only come at a cost which enhances inflation in developed countries.
The third scenario is that the World is at War. The Eastern European War is only part of a Cold War in terms of a tug of War to competing to provide global commodities (oil/gas is first to come to mind) to countries with limited or no resources. The clean energy drive to lower emissions remains a political tool, while the global economy simply has no choice to consume the so-called ‘dirty energies’ for several decades. This includes remedies like nuclear which was ‘shelfed’ for the past decade.
What we realize is that we cannot control Central Bankers, Politicians and can only manage risks and utilize opportunities with our client’s capital. As you may have read in our weekly communication, we have reduced risk in our portfolios gradually since the Russian/Ukraine war started in late February. We have purchased some Gold ETFs purely as a geopolitical risk insurance policy and also added some global energy ETFs. We also continued to add low duration US treasury bonds (yielding 4.25% p.a.) in our offshore funds. This trade serves as the fourth scenario to illustrate how ‘different’ the landscape is relative to the past 12 years. I.e. there are real alternatives (TARA) other than equities in a global portfolio. By the end of October, however, we saw more opportunities to get back into risk assets and to take advantage of low valuations to benefit from potential market upside. It is near impossible to accurately time the market though, so we are looking to add risk in a very selective manner and only when appropriate.
Jacques de Kock
Quantitative Analyst & Portfolio Manager
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