Dive into the world of finance with our latest podcast episode with Stuart Lowman as he delves into the world of investment strategies and market dynamics. In this episode, he discusses the impact of geopolitical risks on the financial landscape with experts David Bacher and Grant Morris. Discover their insights on managing portfolios in turbulent times and get tips for navigating the competition. Plus, hear their thoughts on potential market triggers and where to find value opportunities. Don’t miss this informative and engaging discussion. Remember, each dawn of Monday is your chance to pitch your winning stocks. With enticing prizes awaiting, the game is on. Rally your comrades and head to www.fantasyfundmanager.co.za to register—big thanks to our platinum sponsors, Sharenet, Terebinth Capital, ClucasGray Asset Management, and MoneyBetter. And mark your calendars: Subscribe now to our podcast to keep up with every episode.
Listen here:
Stuart Lowman: We’re in week 25 of the 27-week competition, and last week’s winner was Gino Pozzobon, who managed a 6.66% return. The overall leader is Graham Keith Silver, who’s up 11.97%. An interesting overall stat is that only 11% of players have managed a positive return. Corion Capital’s David Bacher and Grant Morris from ClucasGray Asset Management are joining me in the studio to understand this and more. Dave, are you part of that 11%?
David Bacher: Unfortunately, I am not. I was looking good early on, and in the last two weeks, I’ve taken on more risks to catch up with my peers. However, as they say, with great risk comes the potential for great upside or, unfortunately for me, the downside.
Stuart Lowman: Grant, I can’t ask the same question for you because I know you’ve just slipped from first to second as of this morning. But before we get into that, my colleague Alec Hogg spoke to your colleague Andrew Vintcent, and he spoke about your equity fund and its three-year compound return of 23%. I see the JSE benchmark over that same period was 12%. So, for our listeners, what’s your secret sauce?
Grant Morris: Good morning, David. Good morning, Stuart. Look, I think that Andrew and I have tried to stick to a consistent process over a period of time. There are phases where our processes work exceptionally well, and sometimes, we feel that things aren’t going as planned. The key is staying patient with our investment cases after completing the necessary homework. Fortunately, several factors have played out favourably for our equity fund. So, I wouldn’t attribute it to a single secret ingredient but rather a combination of factors and our commitment to a consistent process.
Stuart Lowman: If we look at the current market dynamics we’re operating in, we have the Middle East War and the ongoing Ukraine conflict, which, at the time of recording, is into day 600. What impact is this having on the markets in general?
David Bacher: It’s having a significant impact. Geopolitical risks typically hurt assets, though not all. These risks can lead to shifts in capital allocation, increased budget deficits, and contracting economies, which raises the risk of inflation. It’s a real concern, and that’s just the financial aspect. We mustn’t forget the human toll, which is foremost in everyone’s mind. So, from a financial perspective, portfolio managers and capital allocators have closely monitored these events and likely adjusted their portfolios.
Stuart Lowman: Grant, any insights to add?
Grant Morris: Yes, I agree with David, Stuart. The impact is indeed significant. We’re currently facing a complex macroeconomic landscape. Apart from the conflicts mentioned in the Middle East, we must also consider potential spillover effects in the wider region. As David pointed out, this can impact oil prices, among other things. Moreover, we’re in a situation where inflation levels in certain areas are still high enough to prevent central banks from initiating rate cuts, which could support risk assets in the future.
I want to highlight that we firmly believe in fundamental analysis, but there are times when macroeconomic factors like rising bond yields and geopolitical risks temporarily overshadow fundamentals. While fundamental analysis remains critical in the medium to long term, these external factors can drive short-term market behaviour, leaving few places to hide, except perhaps gold.
David Bacher: Grant, I’ve been surprised by the behaviour of oil prices. If we look at oil prices in September, they were higher than now, despite the ongoing conflicts in the Middle East. Historically, we’ve seen greater rallies in oil prices during such regional conflicts. Could you provide some insights into why this might be the case?
Grant Morris: I don’t have all the insights, David, but I share your surprise. Historically, we have observed that oil prices tend to spike during regional conflicts. One possible factor offsetting this trend could be slowing demand due to economic slowdowns. Supply chain disruptions and complications may also be contributing. However, given the circumstances, I expected oil prices to be closer to or even above $100 a barrel. This deviation from the historical pattern could have inflationary consequences and may give central bankers a reason to refrain from adjusting interest rates.
Stuart Lowman: Is the prospect of higher interest rates for an extended period the primary concern among investment firms, Grant, and what implications does it have for the broader markets?
Grant Morris: Indeed, Stuart, you’ve hit the nail. When interest rates remain elevated for an extended period, it can result in a higher cost of capital and a repricing of assets that essentially bakes in the expectation of prolonged rate increases. In such an environment, seeing equity valuations heading anywhere positive becomes challenging. However, it’s important not to become overly pessimistic about the current and immediate circumstances.
I believe that as the regional conflicts in the Middle East hopefully find resolution, we may see a more favourable backdrop for risk assets in the future.
Stuart Lowman: I was reading Piet Viljoen’s newsletter this week, where he reflected on Black Monday, which occurred yesterday in 1987, when markets plummeted by 22% in a single day. He extrapolated forward on the compound return, which amounted to a 7% annual return over the period since. It’s almost as if we shouldn’t say, “This too shall pass,” but as investment managers, do you find it necessary to look ahead and recognise that these events, although impactful, are temporary? Do you focus on investing in fundamentally sound companies that can weather such storms?
David Bacher: Absolutely, Stuart. Over time, assets reward investors for enduring their volatility and associated risks. Real assets like equities can be challenging to go structurally underweight because predicting their timing is difficult. Missing out on market rebounds during periods of turmoil can be costly. Therefore, it’s crucial to recognise that investing inherently involves short-term volatility, but the potential for a significant real return over time makes it worthwhile.
Stuart Lowman: Grant, do you share the same sentiment?
Grant Morris: I couldn’t agree more, Stuart. David has summed it up well. It’s essential to acknowledge the short-term volatility while focusing on the long-term investment goals. Equities can provide substantial returns that outpace inflation significantly when held through market cycles.
Stuart Lowman: With the current bearish trend or downturn, whatever we may call it, is there a specific trigger that investors should be looking for that could signify a change in the market’s direction? Perhaps a key indicator or economic factor?
Grant Morris: Stuart, any shift will likely be led by the United States. We need to observe the initial signs of inflation being contained and the Federal Reserve transitioning from maintaining current interest rates to gradually lowering rates. Such indications would be positive for risk assets. A similar situation could apply to the Eurozone. Positive signs from the US or the Eurozone could serve as crucial indicators.
Stuart Lowman: Given the current market dynamics, Grant, are there any specific stocks or sectors that gamers should consider for potential value opportunities?
Grant Morris: Absolutely, Stuart. This week has been sobering, and I’ve seen a decline of just over 3%. It might be a good time to reset and look for value opportunities. I believe it’s worth considering some form of hedge in the energy sector, such as Sasol, Exxaro, or Thungela, as a portfolio hedge. Balancing your portfolio with defensive assets like food retailers and healthcare could provide stability. However, it’s also important to include assets with growth potential, such as resource or telecommunications companies, which have had a challenging few weeks. A balanced approach, like a barbell strategy, might be beneficial, allowing for a mix of assets that can bounce back and those that can maintain stability.
Stuart Lowman: Dave, with just two weeks left in the competition, do you have any tips for our listeners?
David Bacher: My confidence is quite low at the moment, Stuart. Volatility often clusters, meaning that when a stock experiences a significant drop, it can either rebound or remain uncertain. I attempted a catch-up trade with Pick n Pay, but it didn’t go as planned. So, I’m not in a position to offer much advice. I’m taking some friendly ribbing from my colleagues, but I believe I’m better suited to managing real-world investments for my clients than trying to outsmart my peers in a game.
Stuart Lowman: I noticed the headline “Pick n Pray” – we’ve adopted a new gaming term. Grant, how about you? Any gaming tips for the upcoming week?
Grant Morris: I will try to clean the slate, Stuart. I’ve had a tough week, and I’ll spend the weekend reassessing my strategy. What has worked for me in the game is identifying assets that have had a rough few weeks and choosing a few. That will be my approach for the next two weeks, and I’d like to see how it pans out.
David Bacher: Grant, as the inaugural winner of this game, I hope you don’t let the pressure get to you. Remember, it’s just a game. While there’s much at stake regarding credibility, it’s important to stay focused on making the best decisions for your portfolio. With only two weeks left, I’m confident you won’t drop the ball near the finish line.
Grant Morris: Thanks, David. It’s been thrilling, and I’ll give it my all. I might be exhausted at the end of these two weeks, but it’s all in good fun. Let’s see how it plays out.
Stuart Lowman: A big thank you to David Bacher from Corion Capital and Grant Morris from ClucasGray Asset Management. And a special thanks to our sponsors, Sharenet, Terebinth Capital, MoneyBetter, and ClucasGray Asset Management, for making this podcast possible. Remember to subscribe to the podcast and make your picks by 9 am on Monday. There are still two weekly prizes up for grabs.
Read also:
