Bruce Whitfield  00:03

Very clear signals out of the United States that the bear market is over, that the good times have returned, even though the interest rate cycle may not have peaked just yet. Meryl Pick is a Portfolio Manager at the Old Mutual Investment Group and is on the line to us this evening from Cape Town. And Meryl Pick, having a look at market action, we are very, very close to erasing 2022's loss, a nine month rally, and it seems to be going strong still.

Meryl Pick  00:31

Good evening, Bruce, and good evening to your listeners. Yes, it's the rally that is defying gravity right now and defying monetary policy tightening, which is really quite baffling. You know, this is one of the steepest US rate cycles in terms of the hiking cycle that we've seen in decades. And yet, the response has been quite counterintuitive thus far. 

Bruce Whitfield  01:03

Counterintuitive, does it defy logic? Is what is happening in markets, particularly US markets, which are highly concentrated at present. And particularly when it comes to the - what do they call, they used to be called the FANG stocks. Now, they're called the Magnificent Seven, I think they're called. I wonder whether these are just anticipating the recovery and therefore running ahead.

Meryl Pick  01:30

Perhaps anticipating the recovery and anticipating, let's say, a Fed pivot or a response to a slowdown, I think the market is reading in that the Fed will cut, will cut rates, and therefore stimulate growth. I'm not so convinced that it's going to be the same playbook this time around, the difference being that we are in an environment of structurally much higher inflation than we've seen for 40 years. So, I think the room to maneuver, the room to cut rates and stimulate spending through that tried and tested path is not quite as simple this time around. To pull that off without reigniting inflation, I think will be quite difficult. I don't think the Fed is going to bail markets out this time as much as they might expect.

Bruce Whitfield  02:28

But the soft landing scenario that actually we're not going to go into a deep recession for very long, if at all, that enough has been done, or maybe one more 25 basis point increase in the United States. And then the US follows the lead of South Africa and perhaps puts rates on hold for a period of time, not cutting vigorously anytime soon, but at least not raising anymore.

Meryl Pick  02:53

Yes, there's potential for that. I mean, I think the Fed has been quite careful to stick to the hymn book of data dependence, and obviously, inflation dependence. Various commodity markets are quite fragile if you look at the supply and demand dynamics, the situation in Russia and Ukraine is still uncertain, which has impact on food markets, on energy markets. So, I think there's still a lot of fragility in the system, which would lead the Fed to maintain that cautious line. When we look at companies in the US that have got to refinance debt, they're coming up into much higher interest rates, we've seen wobbles in the banking sector within the regional banks. So, the signs of a slowdown are there, whether you can talk semantics, whether that becomes a recession and negative growth, or just a slowdown, remains to be seen, but the interest rates are having an impact. Just not necessarily in the stock market.

Bruce Whitfield  04:00

Yeah, absolutely. Anglo American Platinum's results out today. They were always going to be a tough set of results. They are a tough set of results. Profit's down 71%. But do we find a new base and move on from here?

Meryl Pick  04:14

Yes, I think everything will depend on commodity prices from here, particularly rhodium price has come plummeting down from $30,000 an ounce at some point in the last 12 to 18 months to now $4,000. And at these spot prices, most of the PGM producers are kind of breaking even. There's a lot of catch up, capex, in the system that needs to be spent. You know, I think we're seeing the issues coming through in terms of operational reliability from Amplats in particular. So, it will set a new base, but it could drag along the space for quite a while if commodity prices do not pick up. As we said, there's a global slowdown under way, which weighs on demand for cars, a key demand driver for PGM. And a lot of the car demand used to be tilted to war with electric vehicles, which are slowly picking up their market share, particularly important markets like China.

Bruce Whitfield  05:19

Absolutely. And what about the currency? The currency is suddenly on a bit of a tear. And it strikes me that today's sentiment and it is only sentiment, that it is only today, we can't predict tomorrow. But the sentiment is that the worst may be over for US rate hiking cycle, therefore the dollar becomes less attractive and let's start placing our bets on currencies elsewhere. And the Rand is one of the beneficiaries of that.

Meryl Pick  05:45

Absolutely, I think it's just a matter of time. The dollar has been extremely strong. It was sitting at multi-decade highs. I think [non-audible] of a slowdown or a recession. If it is a sharper, deeper recession than the market expects, you could see a flight to safety and the flight into dollar assets which would strengthen the dollar. But structurally over the long term, it has looked exceptionally strong. And we are now starting to roll over in favour of emerging market currencies. Of course, South Africa's... well, we've had loadshedding stage five, a little bit of stage six the past week or so. But I think there's so much bad news in the base from November to now for the Rand that we also could just start lapping a period of less negative news flow locally, which would bolster the Rand.

Bruce Whitfield  06:41

Thank you to our market commentator this evening, Meryl Pick at the Old Mutual Investment Group.