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Overview

Global markets under pressure - MSCI markets delivering another month of losses

Red Alert! Continuing market uncertainty and the Russian attack on Ukraine weighed on global markets in February, as the MSCI markets delivered a second consecutive month of losses with the MSCI World Index shedding 2.5% in US dollar terms in February, while the MSCI Emerging Markets (EM) Index lost 3%.

Within the MSCI World regions, the Pacific region fared the best, albeit with a gain of only 0.2%. The North American and European regions each lost 2.8% in February.

MSCI South Africa - second-best performing country within the EMEA region

Within MSCI EM, the Latin American region provided total return gains of 4.8% in February, with positive performance across all countries. The Asian region lost 2.3% with China down 3.9%. The EMEA (Europe, the Middle East and Africa) region underperformed, dragged down especially by the large losses from Russia (52.7%). MSCI South Africa with a positive total return of 4.7%, was the second-best performing country behind the UAE (+6.8%) within the EMEA region.

Energy and Materials were the only two equity sectors within MSCI World to produce positive total returns over the month, while Materials, Industrials and Consumer Staples provided positive total returns within MSCI EM.

Communication and IT posted the largest losses within MSCI World.

Year-to-date, MSCI World has lost 7.6% in US dollar terms with the North American region shedding 8.1%, followed by Europe (-7.2%) and the Pacific (-5%), while South Africa is up 11.8%.

Uncertainty over the extent and speed of fiscal tightening globally

In macro, uncertainty over the extent and speed of fiscal tightening globally, but particularly in the US, caused heavy gyrations in both bond and equity markets. The Russia-Ukraine war has now increased that uncertainty.

South Africa’s 2022 budget came in market friendly, bolstered by better than forecast fiscal revenue. In addition, the Constitutional Court issued a unanimous ruling during the month that the South African government was within its rights not to implement the third year of the 2018 wage deal, thus removing a large fiscal uncertainty. Also, South Africa’s manufacturing sector has maintained its strong start to the year into February, according to the latest Absa PMI data. The seasonally-adjusted Absa manufacturing PMI rose to 58.6 in February from 57.1 in January, with broad-based support from the underlying sub-indices.

Following the Russian attack on Ukraine, commodity markets rallied strongly

Following the Russian attack on Ukraine in February, commodity markets rallied strongly, with fears mounting of supply disruptions in metal and oil commodities in particular. Oil rose by 11%, breaching US$100/bbl, while palladium and rhodium continued to strengthen, up 5% and 17% respectively. Gold breached US$1 800/oz (+6%) being a safe-haven asset, while copper also gained almost 4%. Iron ore (-7%) was one of the few losers on concerns around global growth.

Despite the developing risk-off environment, the rand remained stable against the US dollar and against the major crosses.

In rand terms, equities outperformed all other asset classes with the FTSE/JSE All Share Index (ALSI) posting a positive total return of 2.9%. Bonds only managed to eke out a total return of 0.5% while Property showed a loss of 3.3% over the month.

INTELLIGENT IMPACT THAT MATTERS

Amplify SCI*Equity FundFund Commentary | January 2022

“The overarching topic in 2022 so far - inflation and the monetary.”Erik NelChief Investment OfficerTerebinth Capital

Amplify SCI*Equity FundFund Commentary | February 2022

“Uncertainity over the extent and speed of fiscal tightening globally, has now been increased by Russian/Ukraine war.”

Mohamed Mayet Chief Executive Officer Sentio Capital

SA Resources surged 16.1% over the month, with Precious Metals and Mining gaining 26.7% and Oil, Gas and Coal gaining 25.3%. SA Financials gained 2.7% as Banks outperformed with a total return of 6%. Real Estate lost 3.3%. SA Industrials shed 7.4% in February (the worst monthly performance since October 2018), with all the industry groups posting negative total returns over the month. The worst performance came from Software & Computers, down 23% (Prosus, Naspers). Year-to-date, the ALSI has recorded a positive total return of 3.8% and the All Bond Index 1.4%. The FTSE/JSE SA Listed Property Index has lost 6%.

Portfolio Performance

Contributors and detractors

As global markets fell sharply, the fund underperformed the benchmark as global exposure took away sharply.

Positive contributions came from overweight positions in Anglo American Platinum, Gold Fields, Harmony Gold and Kumba Iron Ore, as well as underweight positions in Naspers, Prosus, Mondi, Bidcorp, Tiger Brands, Telkom and Barloworld. Global exposure hurt as described above with only Eastern Tobacco, Novo Nordisk and Reckitt Benckiser adding positive alpha.

Alpha detractors included underweight positions in AngloGold Ashanti, Sibanye-Stillwater, Nedbank, Anglo American and Glencore, with the latter showing serious ESG concerns, as well as overweight positions in Foschini, NEPI Rockcastle, Rhodes Food Group and Woolworths. Global positioning in general hurt as

mentioned above, led by Deutsche Post, PepsiCo, TJX, Johnson & Jonson and Adidas.

Portfolio Positioning

WAR – and a number of global risks are rising!

While we have flagged the risks of geopolitical tensions for a while now, we did not foresee the current Russia-Ukraine war in its detail nor can we predict the precise outcome. And while the final global political and economic implications are still very unclear, the following points in our view are already worth discussing:

Covid-19 – does it still matter?: The war has certainly driven the pandemic out of the headlines. Though, with more and more countries loosening Covid-19 restrictions, the move from pandemic to endemic still seems on track, paving the way for further reopening of economies. Even China recently opened the door to a departure from its zero-Covid policy by the start of 2023, according to the Chief Epidemiologist. At this stage, and barring any new more deadly variants, it seems as if the virus is under control, not the least due to wider availability of vaccines and medication.

Globalisation: While China’s abandoning of its zero-Covid policy would most certainly have a positive impact on global supply chains and global trade, the current war has added a further nail in the coffin of global trade as nations consider their dependencies on foreign goods or manufacturing capabilities. We see a strong likelihood of increased onshoring, above the targets already set because of the pandemic.

Commodities: While the reopening trade already had many commodities rising, the war added particular impetus on energy availability. In oil, a lack of investments over the past few years (partly driven by ESG) led to OPEC compliance of 145%, implying that the cartel could not even deliver the agreed-on output, leading to a steep rise in prices. There are some potential mitigating forces in the medium to long term, such as a revival of US shale and political pressure on Saudi Arabia to increase production. A deal with Iran to bring back those barrels might also help and it is interesting to note that the Saudi crown prince has started to reach out to the arch enemy. Other shortages in thermal coal (ESG policies) and gas should also keep prices elevated in the short term at least, with base metals such as copper also rising. To a large degree, global growth should ultimately decide the sustainability of those prices.







Inflation: The above does unfortunately not look good for inflation, at least in the short term. However, there are some mitigating factors as well outside the commodity complex, even ignoring high historic base effects: Our data show continued supply chain pressures easing, with goods inflation also coming down. Labour markets are showing higher participation rates potentially easing tightness and upward pressure on wages. In addition, the prevailing uncertainty around inflation and global politics could lead to slower consumption, further easing inflationary pressure – but also eventually growth.

While those mitigating factors are a positive, we have been firm since the middle of last year that a large part of inflation would not be “transitory” as parts of the basket would remain sticky. We now have to acknowledge that the “sticky” part has unfortunately increased: Two-thirds of the core US CPI basket has seen 4% annualised inflation since last July (vs. only 19% of the basket in 2019), and 16% of prices rose at a double-digit pace (vs. 2% in 2019). Regardless of the exact threshold chosen, the breadth of high inflation has returned to levels last seen in the 1980s.

Interest rates: A mere couple of weeks ago, interest rate expectations for the US were high, with many expecting a 50-bps hike in March. The war has brought these expectations down again to a 25-bps hike in March, given the global uncertainty, but followed by 11 more hikes until end-2023. For sure, Russia-Ukraine tensions have pushed the US Federal Reserve (Fed)’s geopolitical risk index to a very high level. Any direct effects on the US economy should be limited because trade links are weak and energy prices are likely to be

affected far less in the US than in Europe. The growth hit could be somewhat larger if geopolitical risk tightens financial conditions materially and increases uncertainty for businesses. For now, though, the Fed tightening cycle seems on track. Should the Volcker regime from the 70s in the current growth/inflation conundrum repeat, a substantial slowdown would be the consequence given the high financialisation of assets. This is not our base case, but risks are there despite the yield curve suggesting a Fed policy easing in 2024 already. In Europe, even though rising energy prices in particular are driving inflation higher, growth concerns are emerging because of the war, suggesting a delayed and more cautious tightening cycle seems for now as the likeliest scenario. In China, with inflation currently not an issue, expectations for further fiscal and monetary easing to stimulate growth are expected. In all, it seems that we will see a geographically uneven, somewhat shallower and shorter tightening cycle than expected even a month ago.

Growth: Our view was that of a slowing, but still above-trend global economic growth. And while China’s stimulus and reopening plans are a positive, the likelihood of global growth slowing more than expected is increasing as uncertainty takes hold if war and inflation drags on. Stagflation still is too early to tell but risks are increasing. A lot will depend on the duration of the war and its effect on global confidence.

ESG – an inconvenient truth: The side effect of the above is that COP26 is now a distant memory. The West’s dependence on fossil fuels was shown up in the current war, with energy prices rising sharply. As

consumption is increasing with reopening economies and bottlenecks persist, exit strategies for fossil fuels have been delayed by at least a few years. We have always maintained that unless there is a truly global strategy and implementation of transitioning from fossil fuel to other energy sources, COP26 was unfortunately always going to be lip service only, something that is becoming quite clear already a year hence. In addition, in the current dire investment environment investors are abandoning their quest for ESG in pursuit of returns, no matter how “green” they are, thus chasing coal, oil and similar names in the market.







Current Positioning

The situation regarding the war is fluid, but our initial assessments involve large impacts on the local economies, and a more nuanced impact outside the areas directly affected by the conflict, with commodity price risks a key part of the likely transmission mechanism. We currently expect the risks to growth to be highest in neighbouring economies, and thus see more near-term downside to Euro area growth than to the US. Our current expectation is that the impact of growth and inflation shifts is roughly neutral for the Fed but raises some risk of a delayed European Central Bank exit. China stimulus should continue to add to growth and demand for commodities.

South Africa’s market seems well positioned within this spectrum, given its exposure to resources, attractive valuations and its underweight position in overseas portfolios. A market-friendly budget and robust institutional framework could attract portfolio and even foreign direct investment flows in the long term, potentially catering for further positive economic upside surprises. Structural challenges remain, however.

With this, the fund will continue its slightly procyclical tilt through SA assets – resources in particular – while carefully balancing that with global quality exposure through a scientific portfolio construction framework.

Disclaimer Sanlam Collective Investments (RF) (Pty) Ltd (“SCI”) is a registered and approved Manager in terms of the Collective Investment Schemes Control Act. Collective investment schemes are generally medium- to long-term investments. Past performance is not necessarily a guide to future performance, and the value of investments/units /unit trusts may go down as well as up. A schedule of fees and charges and maximum commissions is available from the Manager on request. Collective investments are traded at ruling prices and can engage in borrowing and scrip lending. The Manager does not provide any guarantee with respect to either the capital or the return of a portfolio. The manager has the right to close the portfolio to new investors in order to manage it more efficiently in accordance with its mandate. Income funds derive their income primarily from interest-bearing instruments. The yield is current and is calculated on a daily basis. If the fund holds assets in foreign countries it could be exposed to the following risks regarding potential constraints on liquidity and the repatriation of funds: macro-economic, political, foreign exchange. The Manager retains full legal responsibility for the co-brand portfolio’s. Collective investments are calculated on a net asset value basis, which is the total market value of all assets in the portfolio including any income accruals and less any deductible expenses such as audit fees, brokerage and service fees. Forward pricing is used. Performance is based on NAV to NAV calculations with income reinvestments done on the ex-div date. Performance is calculated for the portfolio and the individual investor performance may differ as a result of initial fees, actual investment date, date of reinvestment and dividendwithholding tax. Amplify SCI* Strategic Income Fund Maximum fund charges include (incl. VAT): Manager initial fee (max.): 0.00; Manager annual fee (max.): 0.58%; Total Expense Ratio (TER): 0.65%. The Manager retains full legal responsibility of the third-party portfolio. The registered name of the fund is Amplify Sanlam Collective Investments Strategic Income Fund.

*Sanlam Collective Investments Sentio Capital Management is a licenced financial services provider

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