Markets in a Nutshell — February 2022
Russian war threats against Ukraine turned into a full-scale invasion, trumping market worries about the direction and timing of the Fed’s interest rate decisions. Developed and emerging markets retraced as the risk environment deteriorated. Only a few commodity exporting countries benefited from the spike up in commodity prices. Commodities responded sharply on expectations of war-related supply shortages to come. Precious metals gold and silver were also well bid on the back of the rising risk environment.
In South Africa, resources and financials pulled the FTSE/JSE Capped All Share Index up, while industrials lagged. Naspers and Prosus were the largest detractors from the SA investments on a surprisingly large sell off. The managers maintain their conviction in this investment given the steep discount to key underlying asset Tencent. BHP Group and Anglogold Ashanti contributed positively to fund returns.
The All Bond Index gained, with holdings in the longer duration sectors contributing the most. South African government bonds continue to offer relatively attractive real yields. The rand was surprisingly stable given the negative global sentiment. Notwithstanding a mildly positive budget speech, the currency suffers from structurally weak longer term fundamentals.
Safety First
Foord’s safety-first approach and management of downside risks led to outperformance by the Foord global funds as should be expected given this turn of events. The NewGold ETF also made a significant contribution to the multi-asset fund returns. This was countered to some extent by lower relative returns from South African assets given the more judicious weighting to the volatile resources sector. Resources is the second-largest sector allocation in our domestic book and made a significant contribution to returns. Foord’s allocation is significantly below the ~40% weight in the index — which in our opinion is too large given the highly cyclical nature of the sector and the prevailing global macro-economic risks.
Exchange Controls
Finance Minister Godongwana surprised the market in the February Budget Speech with an unexpected relaxation of exchange controls for South African institutional investors. Exchange control has effectively become a non-issue for South African pension funds as, in our view, the risk/reward attributes of non-South African investments deteriorate beyond the new 45% limit.
The Foord funds already have a meaningful weight to non-South African economic assets, be they directly offshore or via JSE-listed global companies. We are nevertheless pleased with the latest change, always preferring more degrees of freedom to less. As such, we are likely to take a more tactical approach to the marginal inclusion of global assets into the portfolios. For example, we might substitute some of the JSE-listed global companies in the domestic component of the fund with higher conviction single-stock ideas directly offshore that better suit the risk mandates of the respective funds. Foord has the integrated global investment capability required to make good use of it for our investors.
Elevated Risk Environment
The Foord funds were already on a cautious footing before Russia’s invasion of Ukraine. We are in the midst of an inflection point in global inflation and interest rates with large implications for the liquidity cycle. The inflationary cycle is now likely to be prolonged due to the commodity price increases and supply chain constraints. There is also a rising risk of a significant mark down in global economic growth given the European growth implications of constrained gas supplies.
Lastly, the ongoing China economic rebalancing and property developer slowdown is also a near-term headwind. This is precisely what we have been talking about when we say “elevated risk environment”. But Foord’s scenarios-based approach and probabilistic risk framework means that the funds are well positioned for the unfolding environment. Liquidity has been kept at a maximum so that the managers can move rapidly when needed to exploit the long-term opportunities that the current situation is likely to offer up.
Your investors’ assets are in safe hands.