By late afternoon on Tuesday, Nick Kunze had seen enough, and the market hadn’t even stopped trading. By the close, South African shares were down more than 5.5%. The rand had shed more than 3% against the dollar. Platinum was off 16%. And Brent crude was heading to $85 a barrel from about $71 just a week ago.
“It’s horrific,” the Sanlam Private Wealth portfolio manager says from his Joburg office. So, what was his smart trade? “Turn your phone off. Don’t look at your screen.”
Kunze has been in markets for just more than 30 years – through the 1997-98 Asian financial crisis, the dot-com bust, the global financial crisis, the 2003 Iraq invasion and Covid, across London, New York and Joburg.
The tailspin in markets follows an extended run in everything from AI shares and gold to emerging-market currencies and bonds. The wild swings suggest forced selling from investors who borrowed to buy risk assets and are now being hit with margin calls – demands from brokers to add more cash or sell positions quickly as prices fall.
“There are a lot of people geared up on borrowed money, a lot of margin calls, and you’re seeing a real unwind,” says Kunze. Silver prices, for example, have plunged roughly 30% since the end of January – following an almost tripling in prices over six months. Gold, after reaching a record high of almost $5,600 an ounce in late January, fell almost 5% on Tuesday to hover just above $5,000, despite its supposed safe-haven status.
Winning streak
Until then, South African investors had been enjoying an unusually good run. The FTSE/JSE all share index had gained in each of the past 12 months – the longest winning streak since 1995, according to Bloomberg – powered by booming metals prices, a firmer rand, signs of an improving economic growth trajectory and an improved inflation outlook.
Then, on February 28, US and Israeli forces struck Iran, killing Supreme Leader Ali Khamenei. The Strait of Hormuz – through which a fifth of the world’s daily oil supply passes – ground to a near-halt amid fears tankers would be targeted. Interest-rate derivatives, which as recently as Friday had priced in a 32% chance of a 25-basis-point cut at the South African Reserve Bank (SARB) meeting later this month, now price in none at all, according to Bloomberg.
“We were basking in the light of a very well-received budget. We’d come off the greylist. We had this tailwind,” Kunze says. “And within the space of four days … events you can’t control. That’s the markets for you.”
The manager has other advice: wait. If the crisis resolves quickly, investors with cash on the side can look for bargains with a long-term view. If it drags on, “it is a major event, and it gets very tricky”. Either way, don’t try to time it. “You can’t pick a bottom here. You’re never going to get the exact bottom, but you can catch it when things turn.”
When the war hits home
Higher oil prices translate into fuel price increases, inflation risks build and interest rate cuts get pushed out.
George Glynos, co-founder and head of research at ETM Analytics, says the inflationary hit will not be felt immediately if the conflict resolves quickly. “If they remain at these levels for several more months, you’ll probably see the effects from May or June, and then they’ll come through strongly.”
He doesn’t expect the SARB to hike rates, but a cut is off the table for longer than markets had assumed. “I don’t think a May cut is realistic if oil prices stay elevated and the rand continues to weaken.”
Already, local bonds were expensive, having priced in a great deal of good news from both the budget and the SARB’s shift to a lower inflation target of 3%. “If the rand is weak and inflation pops up, bonds won’t be able to sustain current levels,” warns Glynos.
South Africa has a partial natural hedge in gold, but Glynos is measured about its limits. If sustained high oil prices weigh on global growth, “you’ll likely see a rotation away from emerging markets broadly”.
National Treasury director-general Duncan Pieterse told Bloomberg the country’s stronger fiscal position gives it “a sizeable cushion”, estimating that revenue would need to fall – or spending rise – by about R60bn to knock its fiscal path materially off course, with higher crude potentially offset by stronger commodity receipts. But that holds only if the conflict’s impacts are short-lived, he warned.
What this fund manager is doing
John Stopford, head of multi-asset income at Ninety One, was already positioned defensively before the strikes. “Focus on what was driving markets before this, because that will likely drive them again when it’s over.”
His Global Managed Income Fund holds about 60% in developed-market sovereigns and 20% in emerging-market sovereigns, with equity at roughly 7% and net high-yield exposure close to zero.
Stopford uses options – contracts that give the holder the right, but not the obligation, to buy or sell an asset at a predetermined price – as insurance against both scenarios: out-of-the-money calls on major equity indices to participate if markets recover, and call options on US Treasuries should yields fall sharply. He has been adding to Brazilian government bonds hedged to dollars, where he believes rates of about 15% could fall towards 10.5%-11% over the next year.
His deeper concern is valuation and concentration. US equities have grown increasingly speculative, he argues, and global indices are dangerously top-heavy. Global indices like the MSCI world and the MSCI all country world index are dominated by a handful of AI-linked names whose defence strategies remain unclear, and whose cash flows are deteriorating as spending ramps up.
“When markets reprice off narrative, they often don’t move 5% or 10% – they can move 50% or more,” Stopford cautions. He thinks volatility itself is mispriced, and warns that investors may be too complacent.
Structurally intact
But the emerging-market bond story he likes – South Africa, Mexico, Peru, Indonesia – remains structurally intact, given improved credit quality, better fiscal and monetary management and lower inflation.
His recent equity additions include Relx – the UK legal-information business whose proprietary-data “moat” he considers hard for AI to displace – and Amadeus, the travel-industry transaction processor that has sold off amid disruption to Middle East flights; the company’s dividends are secure, he argues.
On gold, Stopford had already trimmed his position in Northern Star, the Australian miner, while retaining only a small holding in Gold Fields. “When everyone is rushing in, I’m usually rushing out. At these levels, I see more downside risk than upside. We’re happy to leave the last leg to someone else.”
The fund also holds CME Group, owner of the Chicago Mercantile Exchange and the world’s largest derivatives marketplace, as a direct beneficiary of volatility.
Take some chips off the table
“If this lasts two to four weeks, I don’t think it has a permanent impact,” says Peter Armitage, CEO of Anchor Capital. “If it gets drawn out, the economic impact matters more than the geopolitical noise.”
Armitage is sticking with Anchor’s house view that the rand could end the year at R16/$, though he concedes the dollar could surprise further on the upside.
Rather than chasing what has already rallied – defence stocks and oil companies – he sees the more interesting opportunity in what has been disproportionately sold off: the “perceived AI losers” like software companies.
His view on big tech, though, is different. Spending programmes at companies like Microsoft, Alphabet and Meta were, until recently, funded from profits; their risk largely contained. But that changed and gargantuan capex bills now comfortably exceed profits, with these “hyperscalers” taking on debt to fund infrastructure whose commercial returns remain uncertain.
“They’re spending money without knowing 100% what the business plan is,” says Armitage.
He maintains that investors must stick with their long-term financial plan, not panic, and look for opportunities.
“Stay invested,” he says, “but stay selective.”
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Top image: Rawpixel/Currency collage.
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