It is well documented in academic research paper after paper that the biggest risk factor affecting market returns is unexpected increases in interest rates. Investors watch all indicators that might presage such an event like hawks. in that respectit was a busy month. In the US, three recent developments have changed the likely path of US policy rates. First, US core inflation has risen more than expected. Second, incoming data have been consistent with strong global growth momentum. Third, Fed rhetoric has become increasingly hawkish, with a hint of urgency. In response to these developments the market implied probability of a March hike has risen. Traditionally an increase in interest rates signals the beginning of the end for the bull market but in this case the signals are mixed. In the US,anticipated Fiscal stimulus in the US have given a boost to markets. In February MSCI World was up 2.8% the DJ 4.6%, MSCI EM 3.1% and the Hang Seng Index 1.8%. The JSE All Africa 40 Index returned -0.8%, the JSE All Africa Ex SA 30 Index 0.6% and the South African All Share Index a disappointing -3.1%(all figures in USD).
Here is what we can take out from the aboveusing a risk perspective angle:
- Although the SA All Share Index had a horrendous month, the JSE All Africa Ex SA 30 Index did wellat 0.6% up. If we added in our South African portfolio an equal amount of Pan African equities, because of the two markets being completely uncorrelated (0.3 correlation coefficient), we could have improved our risk/return profile to such an extent as to gain a hefty 2.3% in performance.
- Although the MSCI World Index performance looks impressive, if we put it in its proper context, where we look at the risk we had to take in order to achieve that performance, it looks even more impressive. The expected volatility of the index is 13% which translates to a sharp ratio of 2.6.
- Impressive as the MSCI EMperformance is, its risk adjusted performance lags that of the MSCI World as its projected volatility is 17%.
- The HSI performance was 1.8% in February, however, that is not the whole story. Hong Kong is one of only a handful of countries in the world that has zero rated dividend tax. At the current undemanding PE ratio, this market translates into an attractive yield play.
What the future with an unpredictable president in the White House will bring is uncertain. The only thing we can count on is more market volatility in the near future.