Peter Brooke discusses the market volatility that started out the week, following news of the latest high US inflation number, and unpacks the question of whether the market is due an inflation-driven cool off.
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Peter Brooke discusses the market volatility that started out the week, following news of the latest high US inflation number, and unpacks the question of whether the market is due an inflation-driven cool off.
Thanks for listening! Follow us on Linkedin.
Bruce Whitfield 00:06
Also listening in on that part of the conversation, Peter Brooke, Portfolio Manager at the Old Mutual Investment Group. And that sort of certainty that the Reserve Bank Governor is pushing for is kind of hard to see in the daily maelstrom of market panic and volatility, Peter Brooke, and of that there has been plenty today.
Peter Brooke 00:25
That is true. The Aussies took a good day to have a holiday. Yeah, we've actually... if you look at it, you've had three very sharp down days in the US. Basically, since that high inflation number came out, and that sort of basically contagion-ing around the world, with all markets down sharply, and South Africa just following in line with it.
Bruce Whitfield 00:53
How grey are you going? I mean, you're a fit young man, relatively speaking, are you taking strain in this current sell-off? Were you sort of riding it like the Bronco rider that you've become over many years of market fluctuations?
Peter Brooke 01:09
I was actually rather enjoying it for the first sort of period, because a lot of the things that were selling off were things that we thought were extremely expensive, and we didn't own any of. So, US bonds, Bitcoin, growth shares in America. But as it sort of got worse, it's starting to take down shares that we do think has value, and we do think there's opportunities. And so, obviously that starts to weigh on you. But that also creates opportunity, because you can look to buy into some of those good assets that get priced down.
Bruce Whitfield 01:44
I mean, suddenly, this market is feeling "all fall down-ish". And I think it's far from all fall down-ish. It's just a question of how aggressive central banks have to become in order to bring the inflation monster under control. And the question is whether or not that pushes the US into recession. And I don't know if that's that much of a big deal. I know Americans panic about recession. But it's part of a natural cycle that we've kind of fallen out of in the last decade and a half. And I wonder if we're not due just a bit of a cool off.
Peter Brooke 02:16
I think that's probably correct. And the interesting thing is, a lot of the recessions that we have had have been huge events. Think of the global financial crisis. In the old days, we used to have slightly more frequent recessions and slightly smaller. So, they do have a big impact, because obviously, they're not profits. But they also, in a way, the truth is that the world is overheating, you can see that through the level of inflation. And therefore, we need a little bit of a reset, and sort of a short, sharp recession, while definitely unpleasant - if you take sort of the Old English adage of a bracing storm, it does create opportunity from those moves.Bruce Whitfield 03:01
It was most certainly, I mean, it most certainly does. But we're seeing wild fluctuations, and the currency also wreaking havoc, and Lesetja Kganyago, now just talking about the currency, and of course, the importance of keeping interest rates competitive worldwide. So, that even though we're not seeing demand driven inflationary pressures in South Africa, at least what we are seeing is an attempt to keep inflation under control, an element of predictability. And I was just looking at a table today of inflation rates around the world and just how close South Africa would have come to these sorts of catastrophic numbers of: Argentina, 51%. Venezuela at 500. Turkey at 60%. Zimbabwe at 87%. And other countries in the 60s and 70% of inflation, with expectations from the IMF, of South Africa sort of sitting between five and 10%, along with much of the rest of the world and, you know, Russian inflation spiking up as well. And I just look at this and think how different things could have been without a firm policy stance being taken first by National Treasury and then implemented by the Reserve Bank.
Peter Brooke 04:12
I completely agree with you. So, let's take today's moves. The Rand moved out to just over 16, one and a half percent weaker. So, the truth is - I mean, the Japanese Yen has weakened by 22% in the last 12 months. We actually are being extremely well behaved if you look from 2018 across it, it sort of never de-levelled other than the blowout for Covid. And a lot of that is due to the fact that our inflation differentials have narrowed relative to the rest of the world. And a lot of it is actually due to having a hawk like Lesetja Kganyago at the tiller, and he's done a good job. Our macro prudential policy, over time, has been consistent. But also, I think, the fact that we were heading into the abyss, and we pulled back, and we're having more sensible policy, has definitely stood us in good stead on a relative competitive basis to the rest of the world, because everyone's got problems. And it's just who's got the money for a shirt and in this environment, South Africa's not looking too bad.
Bruce Whitfield 05:20
Thank you, Peter Brooke. He's a Portfolio Manager at the Old Mutual Investment Group, on the line to us this evening from soggy Cape Town.