There is a profound tension between globally synchronised, stimulative and market supporting monetary policy, and heightened geopolitical risks, notably US/China. These two opposing forces combine poorly with a market, which, due to being late cycle and flows-driven (passive, quants etc.), is overly sensitive to changes in sentiment and newsflow. Risks are high as correlations rise in a market sell-off, and given South Africa is an emerging market, foreign selling of bonds correlates with the falling equity market. The reverse happens on short-term good news. Thus, we see this sideways and volatile market continuing, but with the risk of a significant market crash as monetary policy may not always provide the support needed to counter economic or geopolitical risks.

Given the risks, Rezco funds have been positioned cautiously, generally lagging on the upswing but outperforming when markets fall. Stock picking has also added significant value – in the noise of the markets, some good quality opportunities get missed. Overall, the strategy has been working well over the last year, but to the quarter ended June 2019 lagged strong markets, which were driven by central bank easing.

Read the full article here: Q2 2019 Newsletter