Old Mutual Investment Group

Portfolio Manager, Arthur Karas, and The Money Show’s Bruce Whitfield discuss the JSE’s shaky start to the week

August 23, 2022 Old Mutual Investment Group
Old Mutual Investment Group
Portfolio Manager, Arthur Karas, and The Money Show’s Bruce Whitfield discuss the JSE’s shaky start to the week
Show Notes Transcript Chapter Markers

Portfolio Manager, Arthur Karas, discusses the fairly significant selloff in local markets yesterday, off the back of the Fed’s re-affirmation of its commitment to keep inflation under control by keeping rates high.

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Bruce Whitfield  00:05

To Arthur Karas, who is a Portfolio Manager at the MacroSolutions boutique, at the Old Mutual Investment Group. And Arthur Karas, welcome to The Money Show this evening. An astonishing day of selling and morbidity on global markets today and commodities under pressure. Nowhere really to hide, was there?

Arthur Karas  00:23

Not really. We had some of the defensive stocks picking up a little bit, all stocks that delivered good results in the past week, like Exxaro, which benefits from higher coal prices. So, those had a bit of a better day. But on the whole, a weak day on the back of concern that we are going to get a reaffirmation of the Fed - the US Feds' determination to keep inflation under control, when we [inaudible] later on this week, and kind of bringing people back to earth with a bit of a bunt after a reasonable couple of weeks or months for the market, bit of a bear market rally that we've seen.

Bruce Whitfield  01:01

We can't wish the bad news away, and that's the problem. I think for the last month or so the markets have been wishing that if we ignore it, it'll go away. And it's not. I mean, there's a huge amount of stuff to be shaken out of the global economy that's been building for a dozen years or more.

Arthur Karas  01:15

I think the market is kind of weighing up saying, we've seen equity prices pull back sharply, we've seen quite a few hikes in interest rates globally. And maybe this is it. I think there's a general belief that we've probably seen the peak, the actually peak in inflation. But we're probably going to see inflation remain at elevated levels for some time until we've latched the increases in, for example, energy prices, somewhere in the first quarter of next year. And that we're likely to see interest rates still continue to tick up because I think the, if you remember the debate earlier in the year was when the Fed was behind the curve in terms of fighting inflation. And I think the concern now is we're going to see determination from them to keep rates high, get inflation back under control, and that of course, isn't great for markets. And as a result, we've seen, especially the more growth focused stocks, the US tech stocks this afternoon, took quite a pounding, it got US Treasuries back by about 3%, so it's very much the kind of pattern that one would expect. You think that, you know, you've got a bear market, prices come down, people think its over, prices rebound, and then we have to deal with the facts again.

Bruce Whitfield  02:25

Ja, and the facts are much tougher global economy, much higher cost of living coming through. Domestically, we've had some pretty good results coming through out of the bank side of the retail sector, and today, an update out of Sun International, which suggested that conferencing is coming back a bit, hotel nights are coming back a little bit, and gambling's beginning to pick up again. At least that's what's implied in their trading update.

Arthur Karas  02:48

Absolutely. So, strong results from Sun International. I think very much as expected. We can't see the makeup of that yet, but as you've pointed out, I would expect both the tourist nights in the hotels and the gaming has picked up as life has gotten back to normal. But I think the concern that everyone has is what is the next 12 months going to look like? Are people still going to be going on holiday? Are people still going to be spending money should the economy slow down, should the rise in interest rates start to bite? So, the concern very much forward looking, saying we've got much higher interest rates in the next 12 months, they look at previous 12 months, high inflation coming through, biting into people's disposable income? What's that going to mean for these companies?

Bruce Whitfield  03:33

And what's your sense of it? I mean, are we - we're not exactly in an expansionary phase as an economy. This is the sort of results of cutbacks and smart accounting and smart structuring of businesses... that runs out eventually, you know, are we seeing a peak, perhaps, in earnings for these companies?

Arthur Karas  03:53

It all really depends on how this works out for the consumer. So, it's different for different points, or different levels of income. So, you know, if you're well off, and you've kept your job, you've had lower interest rates, I mean, the kind of interest rate hikes we're talking about here in South Africa, barely get us back to where we were pre-Covid. So, it's not like we're going to very high interest rates that are really going to hammer people. I think that it's been a combination of high interest rates plus higher petrol prices, higher food prices, that kind of add up. So, we're probably going to see a fall in the petrol price coming through next month. So, that's going to take a bit of that pressure off. But the higher interest rates are going to be there for a while. So, it's really about exactly where you are on the income curves. I think one of your previous speakers mentioned concern about things like spending on durables, you know, you can decide not to buy new clothes this weekend. You can decide not to buy a new car. And I think those kinds of things are a worry for the market. I think the more cyclical parts of the economy definitely see investors saying, hang on, good earnings coming through, but I'm worried about the next year. I'm definitely not going to reprice those earnings; I'm going to be a bit more cautious about what I expect.

Bruce Whitfield  05:11

Arthur Karas, thank you, he's at the MacroSolutions boutique at the Old Mutual Investment Group. 

Discussing the markets on the day
Thoughts and concerns around inflation levels, and the impact on growth focused stocks
Discussing the strong results from Sun International’s trading update
Arthur shares his sense of what is coming for companies in the economy’s current state