Old Mutual Investment Group

Macro Perspective 12/2022 | The Fed’s rate hike cycle and emerging markets

March 22, 2022 Old Mutual Investment Group
Old Mutual Investment Group
Macro Perspective 12/2022 | The Fed’s rate hike cycle and emerging markets
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Portfolio Manager, Peter Brooke, shares his latest weekly perspectives, this week unpacking the impact of the Fed’s rate hike cycle on emerging markets like South Africa, asset prices and investment diversification efforts. 

Peter Brooke  00:00

Good day. I'm Peter Brooke, a Portfolio Manager at the Old Mutual Investment Group. This is Macro Perspective 12 of 2022. 

I'm going to talk about interest rates. Last week was really important, as the US Federal Reserve started their hiking cycle with a 25 basis point hike to half a percent. They also very clearly signaled a faster and steeper rate hike cycle with a further 625 basis point hike expected this year and more to come in 2023. 


By itself, the start of a rate hiking cycle shouldn't be a cause for concern. But it does add to an already uncertain environment. For instance, we have very high levels of inflation. There's the war in Ukraine, policy uncertainty in China, and then the whole Covid pandemic still has the ability to introduce more volatility, but also its impact on supply chains. At the same time, we also - and perhaps more importantly - we have tighter fiscal policy coming and tighter liquidity as quantitative easing is replaced by quantitative tightening. And if we look at all these different macro variables coming together, it means that we can't apply a typical playbook, and we need to look at how different macro currents will impact different assets. 


A great example of this is that consumer staples would typically benefit from being more defensive as we move late cycle. However, these companies are losers from high inflation, which has been exacerbated by Russia and Ukraine's impact on the global agricultural markets. Another example is emerging markets. We have long railed against the catch-all of global emerging markets because these are different countries with different drivers. 

A perfect example is year to date, the top 10 performers are all emerging markets, driven higher by better commodity and energy prices. However, on the other side, the collapse of Russia and the decline of heavyweight China has meant that the overall emerging markets have actually underperformed year to date. On a bottom up basis, we're seeing similar effects. So, let's take Shoprite and Massmart, which are two fairly similar companies. Shoprite's up 11%, while Massmart is down 26% year to date, on the back of completely different earnings results. 


As a result, we are focusing our research efforts on a much more granular approach, looking for winners or losers rather than a rising tide lifting all boats. Interestingly, South Africa is currently one of the winners, as we benefit from the disruption of Russian commodities supplies, which is helping our primary producers. 

However, as US rates rise, some diversification will be appropriate, due to South Africa's very low savings rate. Already, we will see rising US rates causing our Reserve Bank to hike by 25 basis points this week. Interestingly, the Egyptian Central Bank hiked rates by 100 basis points. They also depreciated their currency and fixed their bread prices, all in a surprise meeting yesterday. And generally, we should expect more surprising consequences, as last week, marked a change in trend. 

When we think about some of those surprises, we definitely want to avoid those companies who are relying on high yield debt. So, they're vulnerable because they have high levels of gearing, and they have a poor quality balance sheet. A good example of this is the US Small Cap Index, Russell 2000, and the growth shares within there, we would think as being something to avoid. 

I hope you found this perspective useful. Until next week.

Interest rates and the start of the hiking cycle for the US Federal Reserve
What impact does the start of the rate hiking cycle have?
Looking at how different macro currents will impact different assets
Taking a more granular approach with research, and looking for winners and losers