OIG Monthly Market Review

Optimum Investment Group enable our clients to have access to a well - versed investment team with extensive experience in both local and global asset management, which allows clients to grow their wealth and meet their investment objectives. This document outlines financial market movements as well as the effects it had on the Optimum Funds.

Globally, concerns became heightened around record high inflation levels, where central banks were forced to respond by raising interest rates, and at times quicker than expected. The Chinese zero-covid stance was also fully intact, while geopolitical tensions between Russia and Ukraine continued to weigh on sentiment. The graph below summarises the extent to which equities sold-off, most of which have become household names. These companies mostly benefitted from lockdowns in 2020/21, and became what is known as 'Covid darlings' as their share prices ran to record highs in these times – oh what has changed. The Nasdaq sold off a further 8.1% in June, while taking the total tally to 29.5% down for the year. The FTSE 100 (United Kingdom) lost 4.8% during the month, taking its total return 2.9% down for the year.

The 2022 global stock sell-off intensified in June and as a result local equities (JSE All-Share J203T) fell 8.0%. SA bonds (ALBI) fared slightly better, only dropping 3.1%. Focussing on the different sectors on the JSE, only the industrial sector (JSE Industrial Sector 25) was spared from the sell-off, returning 1.6%. This was largely thanks to the rally in share price of Naspers and Prosus, which were up by 38.1% and 30.1% respectively and forms a large part of this sector. The resource sector (JSE Resource 10) endured the most pain, selling off 17.2% as commodity prices came under pressure. The financial sector (JSE Financial 15) gave up most of its gains since the start of the year returning -13.6% in June, and 1.4% since the start of the year.

ECONOMIC OVERVIEW

Local

Growth Outlook

South Africa's GDP expanded by 1.9% in the first quarter of 2022 as recorded in June this year. The Real GDP is now slightly higher than what it was before the Covid-19 pandemic. After the strong Q1 2022 GDP outcome, Investec chief economist Annabel Bishop said the second quarter of this year is likely to record a contraction on the back of the flood damage in the KZN province, and the ramp-up in load-shedding, along with the weakening in global demand and low confidence levels.

Inflation

Inflation continues to be one of the biggest focus areas both locally and globally. Currently the local inflation rate is 6.5% - which is above the upper limits of 3 - 6% set by the South African Reserve Bank - and is expected to continue rising. The transport sector is the highest contributor, adding over 12% to the inflation figures in South Africa (see below graph). Contributing to this is the loss of 40% capacity in the airline industry as well as rising fuel prices. The second largest contributor is food at over 7%, followed by alcoholic beverages at over 6%.

Loadshedding

The South African economy has come under severe pressure as the local power utility, Eskom, struggles to meet the country's power demand. In June, South Africans had to endure almost daily loadshedding which varied from Stage 2 (at least two hours per day), to Stage 6, (at least six hours per day). Two of the main reasons for the heightened power outages were the unresolved salary disputes that led to labourers going on strike, while increased demand for power - due to the cold weather - resulted in Eskom being unable to meet the demand. Business operations were heavily affected, and many companies decided to shut down operations for the duration of loadshedding due to a lack of backing. Some even closed completely as their businesses were operating at a loss.

COVID-19

Following other countries, South Africa has loosened the remaining Covid-19 restrictions, allowing venues to be fully occupied and no longer requiring indoor masks. Masks have become optional altogether. This also implies that the sports and entertainment sectors, which were adversely impacted by the restrictions, are permitted to occupy all available seats in the stadiums. The relaxation of Covid-19 regulations, no longer requiring foreign visitors to present vaccination records or proof of a negative test, is also good news for the tourism industry.

Airline

The South African airline industry lost about 40% in flight capacity due to Comair going into liquidation. The impact goes beyond just losing flight seats, as many employees lost their jobs. Comair operated British Airways and Kulula flights which have both been grounded indefinitely. Over 1 000 people have lost their jobs as a result. On the 9th of June 2022 the business rescue practitioners reported that they failed to obtain the funding needed to rescue the airline. According to StatsSA the price for air travel is up by almost by 50% due to limited supply. Certain airline operations are regarding this as an opportunity to expand their operations; filling the gap left by Comair. One of them, FlySafair, plans to add at least 10 new routes across sub-Saharan Africa.

Politics

In local politics, the scandal over claims that President Cyril Ramaphosa covered up the theft of sizable sums of money from his farm in Limpopo, allegedly in US dollars, raged on. Following the suspension of public protector Busisiwe Mkhwebane by the president, Ramaphosa came under heightened criticism from his political opponents, who also suggested that he should "step down". Although overdue, the suspension's timing is noteworthy because it came a day after Mkhwebane announced that her office would investigate a complaint against the president regarding a theft at his farm in Limpopo. The uncertainty in the politics of South Africa continues.

Employment

Total employment increased by 42 000 or 0,4% quarter-on-quarter, from December 2021 to March 2022. This was largely due to increases in the following industries: community services: 2,4%, manufacturing: 0,7% and mining: 0,4%. The electricity industry reported no quarterly change. However, on the negative side there were decreases in the following industries: trade: -0,8%, construction: -1,7%, business services: -0,3% and transport: 0,5%, according to StatsSA's latest figures

Trade Surplus

On 30th of June SARS reported on the R28.35 billion trade balance surplus for May 2022, this was because of the R179.46 billion in exports and R151.11 billion imports. Overall, the level of exports and imports have been increasing. High commodity st prices in the 1 quarter of 2022 were the main contributors to the trade surplus.

USD/Rand

The rand continued to weaken in the month of June, opened at R15.53 on the 1st of June and closed at R16.26 on 30th June 2022. This can be attributed to loadshedding which is slowing economic activities. However, factors such as increased inflation and interest rates are also major contributors. In addition, the dollar was reported to be at its strongest level against the euro since 2002. Walid Koudmani, chief market analyst at financial brokerage XTB, says the dollar reached its highest level against the euro since December 2002 amid a significant boost in demand for dollars. During the second quarter of the year, the rand was one of the world's weakest currencies, depreciating by -12.1% relative to the US dollar. The graph below shows the long-term exchange rate between the rand and US dollar since 2000, while also showing a trend line. Currently the rand is in an oversold/undervalued area as it is trading above the long-term trend line.

Global

Growth Outlook

The World Bank now sees global economic growth at 2.9% in 2022, significantly lower than the 4.1% that was anticipated in January. This is due to the continued impact of Covid-19 as well as the invasion of Ukraine by Russia. Some of the direct results of the invasion includes increases in food prices which is adding to food insecurity and extreme poverty in developing economies. The war has also increased the supply-chain disruptions.

Russia

Russian oil exports have increased by about 12% in the first five months of 2022 said Russian Prime Minister Alexander Novak, even during the continued conflicts between Russia and Ukraine and despite the heavy European sanctions to limit the import of oil from Russia. Exports to US and Europe have decreased, which used to account for 75% of Russia's oil exports. However, Russia now exports more than 50% of their oil to Asia. The Asian consumers have increased their purchases of oil from Russia to take advantage of the discounts due to sanctions. The Russian rouble is trading at a stronger level against major currencies compared to prior the invasion.

China

China's central bank (The People's Bank of China) is bucking the trend by keeping its interest rates unchanged at 3.75%. It is anticipated that the central bank will reduce its interest rates to support the economy in the face of stringent lockdowns to maintain its Zero-Covid strategy, reported Ernest & Young. The Zero-Covid strategy is further placing pressure on struggling global supply chains, while also causing global growth uncertainty as the 2nd largest economy struggles to get back to one hundred percent work capacity.

Inflation

Nations and economic zones around the world are all battling rising prices after the COVID-19 pandemic threw global supply chains into chaos, and the war in Ukraine pushed food and fuel costs to new heights. The issue is widespread and is affecting the poor the worst. Policymakers insisted that the price hikes were “transitory” – a consequence of snarled supply chains, labour shortages and other issues that would right themselves sooner rather than later. The opposite has been witnessed as we now enter the seventh month of the year. Below is a summary of the latest inflation levels around the world for the month of May.

CRYPTOCURRENCY

How can we ignore cryptocurrencies? The following writing is purely for speculative commentary as we do not hold any cryptocurrencies in the Optimum portfolios – we are not allowed to, is the easy answer. Bitcoin remains the largest crypto by market capitalisation with Ethereum in the second place. The second quarter saw Bitcoin's price fall from about $45,000 at the start of the quarter to slightly above $19,000 at the end – making it the worst quarter in its history. Since the start of the year Bitcoin has lost 60% of its value, Ethereum lost 73% and a major listed crypto trading platform in the US lost 80% of its value.

The cryptocurrency topic is polarised by two views: those who believe that it will be the future of a new global currency, and the sceptics to whom the crypto world is simply a by-product of the extraordinary amount of easy cash that has been propelled into the global economy – a big bubble effect. The entire crypto market thrived after March 2022, when the Federal Reserve in the United States and many other countries around the world, unleashed record amounts of stimulus into the economy to try and curb the damaging effects of Covid-19. That year Bitcoin ran 305%, and the following year 60%.

What we see today is the opposite; the Fed's quantitative tightening (QT) announcement late in 2021, threw global markets into turmoil. Interest rates started to rise from record low rates and governments started to reduce their balance sheet debt. Global risk assets have come under immense pressure, while more speculative assets like cryptos and non-fungible tokens (NFT's) have been worse off. The relation between quantitate easing (QE) and the rise of these digital assets, to the relation between QT and the fall of these prices is growing. These kind of investments/speculations should be made with caution as the risks involved are high, especially in the current rate-hiking-cycle and while global governments are trying to rein in their overspent budget deficits.

HOW DID THE OPTIMUM FUNDS PERFORM?

The Optimum Funds have outperformed their respective benchmarks in June, in what will be remembered as a tough month for markets. The funds are well diversified which has helped to protect capital on the downside, during a month where all asset classes sold off. The strengthening of the dollar helped portfolios considerably and limited the losses from the offshore portion of portfolios.

The longer-term performance for all the Optimum funds is ahead of benchmark, as they continue to add healthy returns to portfolios. Markets have presented a great opportunity to buy assets and asset classes at levels that are much cheaper than before, at less than fair value. The team is focussed to find these opportunities while also keeping their robust process intact. As opportunities do arise, it is also important to be aware of the headwinds that we still face in the world today – our balanced approach helps us to be cognisant of both the positive and negative.

IN SUMMARY

The graph above provides powerful insight into the past. History is an essential tool that helps us make more informed and better investment decisions. As in the past, we have endured tough quarters in the market (and more specifically tough consecutive quarters). The graph shows what return has been achieved on the S&P 500, after the market sold off for two consecutive quarters. The returns in the next quarter are promising, and even more so in the next half of the year. By no means is this a given, however history does have a way of repeating itself.

Here at Optimum we place a huge emphasis on diversification, both as an excellent strategy for risk mitigation, and as a way of creating a constant return profile for clients. Moving into the second half of the year, we see opportunities that have presented itself due to the deep sell-off of most asset classes. We also see the potential headwinds that may continue to create negative sentiment. Many of the same factors that we have highlighted since the start of the year are still with us, with many of these factors extremely tough to predict. Inflation continued to move higher in many major economies during the previous quarter and is now firmly at the forefront of central banks to get in control. The task of bringing inflation down without triggering a recession will be challenging, but this is the problem that we now must face.

Our duty as investment managers is to align portfolios to achieve their optimal outcomes, given their risk profiles. We hope the quarter review is insightful – please do not hesitate to call the team or your advisor if you have any questions.