Peter Brooke 00:00
Good day. My name is Peter Brooke and I'm a Portfolio Manager at the Old Mutual Investment Group. This is only the second Macro Perspective of 2022, and a lot has already happened.
00:11
I certainly didn't think that when we did last week's perspective, when we laid out some thoughts the year ahead, that they would all happen in the next week. We've seen increased volatility, lower returns, rotation from growth to value, and a correction in the Nasdaq falling 11% month to date. The losers in this correction have been investors in crypto, growth stocks, Nasdaq, the US, and all of the beneficiaries of lower US rates. As a result, the sell off on higher US trade expectations has been very specific, as opposed to generalized risk off. This is in keeping with our view that it's about liquidity tightening rather than an upcoming recession.
00:54
The other risk event that has been steadily building over the last three months has been the situation between Russia and Ukraine. As with most geopolitical events, we have no idea what is going to happen, and suspect that no one else does either. But the markets are taking no chances and are selling Russian assets aggressively. The ruble is weakened by 12% in the last three months, the Russian equity market is the worst performing in the world, down 18%, and Russian bond yields have shot up to 9.75%, roughly 200 basis points up.
01:30
What's interesting about this is that this is occurring in an environment of record profits driven by the higher oil prices. So, the market is de-rated to less than six times earnings with a dividend yield of more than 12%. In fact, if spot prices hold in energies in gas and oil, that dividend yield is probably closer to 18%. We would say this is pricing in a lot of the bad news. And the market is basically a buy. However, it is hard to justify to clients to buy Russian assets if they're about to go to war. The relevance to us is, though we see this as a very localized event with only potential - the only potential contagion being into energy markets. And this is much less of a risk than US interest rates, which affect the entire global cost of capital.
02:26
Probably one of the most interesting things about this start of the year and this sharp correction is that most South Africans wouldn't have even noticed it. The JSE is down 0.6% month to date, our bond market is up, and the Rand is nearly 4% stronger. This out-performance reflects that with lower inflation than the US and a current account surplus instead of a deficit, South Africa is in a very different risk position. Our market is also cheap on a forward price earnings ratio of 10.3 times, meaning we are the right side of the value growth rotation.
03:06
The resulting contrast between global and local equity funds is really stark. And I think it highlights that there are also risks to ignoring South African assets as opposed to the consensus view, which is always maximize 100% offshore. The title of this podcast is Macro Perspectives, so, focusing on the short-term price action is fun, and does show us how themes are unfolding. But there's still a lot of water to flow under the bridge this year. We look forward to discussing it with you along the way.
Until next week.