Meryl Pick unpacks a weaker day on the markets yesterday, driven by falling commodities prices off the back of Russian sanctions and the concept of high prices being a cure for high prices.
Bruce Whitfield 00:05
Meryl Pick standing by for us this evening. She's a Portfolio Manager at the Old Mutual Investment Group, and commodities were, again, the key theme, this time going the wrong way from a South African investment perspective. Meryl, good evening.
Meryl Pick 00:17
Good evening, Bruce, and good evening to your listeners. Yes, so today was a weaker day for commodities. In particular, the palladium price, down from 8%. And you can see, then, the PGM shares as a cluster following suit. But, you know, the commodity prices have seen such momentum behind things since the Russia Ukraine invasion, even prior to the invasion, that I suppose one should not be too surprised to see a little bit of steam coming up. I think particularly Brent crude, as well as palladium.
There was some sort of Russia premium being built into the prices of these. Links to sanctions, in my opinion. So, I would think we look at things through a framework of scheme and price, the price is going into the invasion, we're already at - in some cases, two standard deviations above the long-term average. What that really means is, prices are only at that point 5% of the time if you look at data over a very long-term time horizon.
So, we went into this invasion with high prices. I think the market started pricing in a theme of sanctions and restricted supply. We did some research on sanctions over time. Are they effective? Do they actually restrict the flow of commodities when they are put in place? And the reality is actually no, particularly for commodities like oil or high value metals like palladium that are actually easy to transport by air.
These commodities find their way into the market through other means, or countries who are willing to trade with a sanctioned country. And our view is actually these prices were somewhat overdone. And the expectation of supply being restricted was overdone. And perhaps now today, we're seeing some of that reality keeping back into the market. And in addition, for something like Brent crude, high prices are their own pure. So, if the oil price was to stay high for that long, ultimately, it would trigger a slowdown in economic growth, which then slows down demand for oil. So, I think we're seeing the market grapple with that reality and some of the steam coming up.
Bruce Whitfield 02:48
It's fascinating, isn't it? I mean, the best cure for higher prices is higher prices, you see it in practically every industry. The prices are too high, competitors come in and undercut. And that's their check and a balance. Couple of interesting moves on the day, it's quite interesting to see how financial stocks are on the up and up and up. Retail stocks are on the up and up and up, despite the rising interest rate and inflation environments that we're seeing, Meryl.
Meryl Pick 03:13
Correct. So ordinarily, rising interest rates are negative steam for retail sector in particular, as it impacts consumer wallets. I think for the banks or the financial sector, rising interest rates is a positive, because of course, they can charge more for the assets on their book, and the spreads open up between the funding that they use to fund the book versus what they're charging on the other end. So, it's positive for financial.
I think what we're seeing is also perhaps an overlay to that with South Africa as an investment destination relative to other emerging markets at this time. So, there are more than - you know, there's more than one factor at play here. So, another theme is capital fleeing out of Russia, or certainly no new capital going into Russia. That capital needs to find a home. And then at the same time, South Africa's inflation level - we talked about this on your show, maybe a year or two ago, actually - that the inflation gap, the developed market inflation slowly starting to rise, versus South Africa's inflation being very well contained for the last several years. And that gap is actually closing.
One of the drivers for currency is that inflation differential. When I said that on your show, I never imagined that US inflation would exceed ours, but this is where we are. And in a strong Rand environment, the consumer is somewhat protected from, you know, other inflationary impacts, while yes, the petrol price and the interest rates are going up. So, it's not all fall down. You know, we saw Raubex putting out their results today and they're talking very favourably about infrastructure activity and project, pipeline, and operational activity on the ground.
Bruce Whitfield 05:11
Absolutely, they are. Thank you, Meryl Pick, Portfolio Manager at the Old Mutual Investment Group.