The financial year ending in February saw an increase in volatility and a return to risk-off investment strategies in global and local markets. Investors have, and continue to, face a deterring outlook for equities, incredibly low interest rates, the end of quantitative easing and an increasingly aggressive inflationary environment. This has caused Central Banks and Governments to look at increasing interest rates from historically low levels, which will result in further strain on consumers. With the escalating armed crisis in Europe, global investors began selling heavily towards the end of the financial year. Higher than expected global inflation, supply chain disruptions and constraints, as well as the uncertainty caused by the current conflict in Europe have caused most sectors to drop.

The Russian invasion, following months of uncertainty amid Vladimir Putin’s endeavors to increase his areas of influence, has unsettled Europe and the rest of the world. This was evident by the overwhelming results of the emergency NATO vote, which resulted in aggressive sanctions being implemented against Russia. These sanctions against Russia, in particular to their banking sector and the recent implementation of a banning of swift bank payments, has seen Russia becoming increasingly economically isolated. Interestingly, there have not, to date, been any sanctions implemented against Russia’s gas distributions, as Europe is heavily dependent on this flow of energy. As a result of these sanctions, there will likely be an increase in supply chain disruptions, which will add to the inflationary pressures. With Russia also being the top exporter of base and precious metals, as well as oil and gas (supplying over 40% of natural gas to Europe), we have seen a drastic increase in the price of gas and oil, largely due to supply chain disruption concerns. The effect of these higher crude oil prices will lead to steep increases in fuel prices, which will further increase the cost of transportation thereby affecting food prices and this will ultimately put further pressure on consumers.

South Africa has benefited from higher resource and oil prices and has seen local mining shares, as well as our oil counters posting strong gains. The general South African economy, which is historically coming off a lower base, has performed satisfactorily, despite the overwhelming lack of leadership as the ANC focuses on growing party divisions and in-house fighting.  It remains to be seen if any national governance will be undertaken going forward and whether the revelations, as a result of the recently published Zondo Commission Report, will result in any real accountability and convictions against those who were party to the State Capture.

A strong theme emanating from the end of financial year is that volatility is back and it will be interesting to see how the global news feeds change from a focus on the pandemic to a focus on the current conflict. Central Banks are now walking a tight rope between slowing economic momentum, high inflation and elevated risk as a result of the conflict.

We have been incredibly lucky as an organization to have remained nimble in our asset allocation and will continue to monitor earnings, although it appears that volatility will persist in the medium term. It is imperative at times like these to ensure that investment allocation is done into areas and sectors that have survived periods of instability such as the one we are currently experiencing. Companies with solid leadership and sound management who are able to survive volatility with strong balance sheets and good cash flows will be ones that we will consider investing in.

Despite all of the above, the South African market has performed satisfactorily and is among the top performing emerging markets to date. Although the risk-off focus has seen a flight to safe havens as investors buy US Dollars and US bonds, we will continue to monitor developments in Europe, as well as the global interest rate environment to ensure that we balance portfolios with a primary focus on stability and growth.

In closing, we anticipate a bumpy year ahead for equities and during times such as these, our primary focus is to increase exposure into long term Blue Chip quality stocks, as we believe that there will be significant opportunities during the course of this year to buy into assets that will provide good and stable medium to long term returns.

While this is unsettling for any investor and comes at a time when Covid-19 is still causing much uncertainty, it is best not to make knee-jerk changes to any portfolios as history has shown that these shocks are temporary

I would like to take this opportunity to thank my colleagues for their attention to our clients’ requirements, and to our investment family for their support during the past financial year. We will, as always, continue to strive to provide you with excellent service and welcome any feedback and interaction from our investment family.

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