Macro Perspective 35 | News flow adding weight to our investment themes

In this week’s podcast, Peter Brooke talks about the recent news flow that is adding weight to many of our investment themes. First is South Africa’s inflation, which came out better than the consensus at 4.7%, adding to the view that rate cuts could be the next big theme to unfold. He also touches on the recent BRICS summit, which took place in Johannesburg and closes off with the growing impact of politics on markets.

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Chapters

• 0:15 News adding weight to our investment themes: CPI and core inflation down in July in SA
• 0:41 The investment theme of multipolarity with a successful BRICS summit in Joburg
• 1:16 The growing impact of politics in markets as shown in China, Thailand and Italiy
• 3:34 Closing remarks: main risk to our portfolios and what we are seeing in August

Transcript

Peter Brooke  00:01

Good day. I'm Peter Brooke, a Portfolio Manager at the Old Mutual Investment Group. This is Macro Perspective 35 of 2023, and I want to talk about some recent news flow, which is adding weight to many of our investment themes. 

Peter Brooke  00:15

The first is in South Africa, where inflation data came out, with both CPI and core inflation down at 4.7% in July. This is better than consensus and we think is better than the South African Reserve Bank has modeled. This adds to our view that rate cuts will be the next big unfolding theme. And as a result, we need to worry about reinvestment risk and cash and look at increasing duration. 

Peter Brooke  00:41

The second theme that has been affirmed, has been multipolarity, where South Africa hosted a successful BRICS summit in Johannesburg. Now, we agree with all the commentators saying that a BRICS currency is nonsense. But think that misses the point. US dominance has declined gently over time, and the willingness of Saudi Arabia and UAE, both massive holders of US reserves, to join BRICS is an important indicator of this. The world is changing, and it'll be harder for the US to fund its twin deficits going forward. 

Peter Brooke  01:16

The third theme I'm seeing affirmed, is big government, which is the growing impact of politics on markets. As we look around the world, we see ample evidence of this. The topical story this month is the Chinese government, which caused a property crash, and now it's disappointing expectations with slower than expected stimulus. But we see this impact of politics everywhere we look. 

In Thailand, the inability of the largest party to form a government has resulted in a gridlock for three months. In that time, government spending is stalled, taking out an engine as the Thai economy tries to regain altitude. Now, we have a newly elected government who's promised a 10,000 Thai baht payment, which will boost consumption and hopefully we should see some of that growth coming back. 

 This month, we did some work on Poland because it screened as positive on our quants model. But they have an election coming up in October, where there's a growing anti-EU sentiment, which is impacting the flow of funds from the EU, with a material impact on their economy. 

 This month, we saw the Italian government announce a surprise - or a shock in fact - 40% windfall tax on bank profits in a late night press conference, only to try and roll it back the following day. Now, if we look further forward, in the next year, we have elections in the US and South Africa. And while there are some similarities, because South Africa has lots of experience of an elderly ex-president fighting court cases, the difference in terms of geopolitical impact is huge. Trump has material ramifications on the geopolitics, especially the Ukraine war. For South Africans, as we look into next year's elections, the base case is more of the same. But there is growing risk on both the up and the downside as we move deeper into coalition politics, and ANC weight or voting share declines. 

 Peter Brooke  03:34

 Now, the way we sort of see it is the main risk to our portfolios is a positive surprise, because South African assets are pricing in a lot of bad news. Irrespective, what we're seeing in August is lots of evidence supporting some of our long-term themes, one around falling rates, two around a multipolar world, and three, big government impacting markets. 

I hope you enjoyed this perspective. Until next week.