February 2022 Update
F&A Monthly Update | February 2022
Another week of strong news flow has come and gone while providing no real relief to any of us. The Russia / Ukraine war shows no signs of a quick resolution and with little prospect of an amicable outcome, I’d expect it to drag on for a good while.
For those that are concerned, and as you will see below, we do not have and have not had any direct exposure to Russian assets since 2014
Along these lines, I had the most amazing chat with a Russian living in Tyumen, 2’000km east of Moscow, over a Chess app (Nerd alert 🤓). Each player has their national flag next to their name, and when I saw the Russian flag, I typed "Say no to war" in the chat section, to which he replied "F#*k Putin". Needless to say, I stopped playing straight away. We chatted for a good 15 minutes; his wife is Ukrainian, and he shared their disgust for what was happening. Many Russians view Ukraine as their brother country. He seemed well educated and spoke reasonably good English. He shared that many Russians are not ok with the war, nor Putin and that those who display apathy or don’t believe in the war are either too fearful or too governed by propaganda. He was part of a big rally which was arrested in its entirety just last week for protesting the war, he shared in reference to him trying to convince others that Putin and Russia are in the wrong in Ukraine “Если человек идиот, то это надолго". In bad translation it means: "If a person is an idiot, so this is for a long time”. He also shared that he is very glad the rest of the world is supporting Ukraine in their efforts. He shared, in hope “I think world community are developed to judge people by their actions and not by the country”. I sent him and his wife my love and best wishes. My heart goes out to the normal Russian civilian who will pay the price of Putin’s decisions and the West’s response by way of sanctions. It is also not inconceivable to work through the thought exercise of whether we as South Africans are just as apathetic towards the incompetence and corruption present in our leadership.
The silver lining which isn’t getting the headlines it deserves is around Covid and its reversion towards a far more palatable, seasonal flu type profile. Given that SA has an estimated 80% - 90% adult population immunity (vaccine plus natural), it is our hope that SA follows world trends of a complete relaxation of all protocols. As unsettling as it has been for all of us, I think society will look back on the lockdowns, masking and such critically. There have unfortunately been severe consequences because of Covid policy. It is time to return to normal!
This month’s piece is made up of 3 commentaries
Russia / Ukraine Crisis and its effect on SA portfolios (Philip Bradford)
Monthly commentary (Brendan de Jongh)
Legislative changes to Reg 28, allowing additional offshore exposure (Philip Bradford)
Any updates to portfolio strategy will be considered while balancing our view on points 1 & 3 above, around global events as well as changes to local legislation. As is common with our approach, we don’t plan to rush any unnecessary decision making just to look busy. We would far rather be as right as possible the first time.
The Russia/Ukraine crisis has compounded what was already shaky ground for global markets, with expectations of sustained inflation and higher interest rates.
Commodity and energy prices have risen strongly which has exacerbated supply side inflation risk and the risk of a future recession.
The impact on global markets has been varied and South African assets have held up relatively well.
The local currency has remained relatively stable.
SA equities have proven to be a relative safe haven for investors year-to-date, mostly due to our high resource exposure.
Source: Financial Express, PortfolioMetrix
The PMX SA equity fund has benefitted from this through its positioning (generally overweight resources) and has outperformed its benchmark. The underlying managers that have provided excess returns are Fairtree, 36One and Ninety One.
We also do not have any direct exposure to Russia in the portfolios. Our exposure to Emerging Europe has been explicitly “ex-Russia” and we have implemented this way since 2014.
However, the effects of the Russian invasion have been felt globally, and we have seen broader European markets (in particular) suffer.
Performance YTD
Although global equity markets are down -16%, the PMX multi-asset portfolios (PMX Reg 28) have fared far better with our highest risk portfolio down just over 4%:
Source: Financial Express, PortfolioMetrix
Conclusion
The Russia/Ukraine crisis is a serious matter and poses numerous risks to investors.
Under normal circumstances we do not propose directional bets, currently we think it is especially risky.
The PMX portfolios are well diversified and appropriately risked and we think this is the best way to navigate the current crisis.
This month's piece is compiled by Brendan de Jongh, SA Head of Research - PortfolioMetrix.
LOCAL UPDATE
Risk-off. That was the tone for the month as the world watched Russia threaten the Ukrainian border, and subsequently invade. In this uncertain environment we saw commodities and the rand hold strong, but risk assets sell off – this is meaningful. For a more detailed analysis of the conflict in Ukraine read Brandon’s critical analysis here.
South African bonds and equities led the way thanks to their sensitivity to commodity prices. They also buffered portfolios from the negative returns from local and global property, global equities, and global bonds. Within a global context Emerging Markets underperformed Developed Markets but at the same time Value outperformed Growth. This is consistent when viewing which regions beat their respective peers; UK and Pacific ex-Japan equities were strong, along with Latin American equities.
GLOBAL UPDATE
February 2022 will sadly be remembered as the month that Russia invaded Ukraine. As well as the deeply troubling impact on human lives, markets took fright from the initial impact with much uncertainty on the outcome remaining. Given European reliance on Russia for energy, gas and oil prices spiked towards the end of the month, after already having risen in response to rising tensions and low gas inventories. This has served to push global inflation expectations up and global growth expectations down, a challenge for all central banks and a challenge to all their prior signalling. Both equity and bond prices fell on the initial news but indices with more energy exposure (for example the FTSE 100 and EM Latin America) had a relatively better month.
Performance Links
ALLOWING INCREASED FOREIGN EXPOSURE
The asset management team are reviewing our long-term strategic asset allocation for our range of investment portfolios. Read a quick note from Phil Bradford (SA Head of Investments, PortfolioMetrix) on changes to Regulation 28 allowing for increased foreign exposure.