Abax Investments
After a very strong May, we were not surprised to see the market give back some of those gains in June. The FTSE/JSE All Share (ALSI) declined 5.7% in June. Healthcare (+2.7%) was the best performing industry group, followed by Telecommunication (+0.5%). Basic Materials (-14.4%) was the worst performing sector. This sector continues to be weighed down by an uncertain demand picture, weak commodity prices and volatile labour relations. For the month, our holdings in AVI (+4.3%) and MTN (+0.7%) aided our performance, whereas Anglo American (-18.4%) and BHP Billiton (-13.8%) detracted.

The prospect that the Fed would begin normalising monetary policy earlier than expected underpinned the selloff in June. In addition, concerns over the pace of growth in China are unsettling investors. The official Chinese manufacturing PMI fell to 50.1 in June - the lowest reading in four months. China's policymakers have been particularly concerned with the rapid growth in credit and want to slow the pace of leverage build-up. Whilst the slump in credit will suppress economic growth in the short term, it should create a sound foundation for future growth. Thus, achieving the government's 7.5% growth target this year could be a challenge.
Away from China, growth momentum is also tilted to the downside. The World Bank recently cut its global growth forecast - the world economy is now expected to expand by +2.2% in 2013, less than their January forecast (+2.4%) and slower than 2012 (+2.3%). Emerging markets (such as South Africa) will not be unscathed. The protest action in Brazil, Turkey and South Africa is indicative of rising stress in these developing economies.

The impact of the removal of monetary stimulus will be felt not only in the US but around the world. Given the above considerations, we continue to search for and invest in reasonably priced and well run businesses that our research shows will be able to grow their profits and dividends in uncertain times.

The Fund currently trades on a forward rolling Price/Earnings (P/E) ratio of 11.9x and a dividend yield of 3.2%, with an anticipated 12-month forward earnings per share growth of 18%.

South African stocks ended the year near record highs, with the FTSE / JSE All Share Index recording a return of 3.2% for December. Within the industry groups, Healthcare performed well (+8.9%), followed by Telecommunications (+7.9%). In contrast, the Technology sector performed poorly, declining by 5.1% for the month. Our holdings in Absa (+12.0%), Amplats (+10.9%) and Mediclinic (+8.8%) did particularly well. Unfortunately, our holdings in Goldfields (-9.0%), AngloGold (-5.4%) and Reinet (-4.8%) underperformed.

For the year, the JSE All Share Index gained 26.7%, shrugging off uninspiring economic growth, crippling labour strikes and credit downgrades.

2012 was troubled by the Eurozone crisis, fears of a hard landing in China and concerns about the sluggish pace of US economic growth. While progress has been made in some areas, many issues remain unresolved as we enter 2013. The global economic outlook remains challenging, particularly for advanced economies under the weight of continuing fiscal austerity, particularly the Eurozone. Concerns of a US fiscal crisis in 2013 also represent an underlying risk. Recently, the White House and Congress reached a deal to avert the fiscal cliff, which would have resulted in sharp spending cuts and tax rises. However, the agreement solely addressed the issue of taxes, delaying a necessary decision on spending cuts.

Conditions in China appear to have stabilised, with the HSBC China Manufacturing PMI for December recovering to a 19-month high at 51.5. It remains to be seen if a sustainable recovery can unfold. China is critical to the outlook for economically-sensitive commodities and a renewed uptrend could reassert itself as the downside risks facing the Chinese economy continue to abate.

In South Africa, the leadership of the ruling African National Congress was decided at the party’s elective conference in Mangaung. Jacob Zuma was re-elected as president for a further term, with Cyril Ramaphosa his deputy. On balance, the outcome was market positive given the expectation that Mr Ramaphosa will drive business-friendly policy and keep populist demands at bay. As deputy chairman of the National Planning Commission, we are hopeful that he can also push for the implementation of the National Development Plan - a strategy that seeks inclusive growth and aims to eliminate poverty and reduce inequality. Progress in this regard is key to rebuilding momentum in the local economy.

Heading into 2013, the tug of war between global central banks’ continuous monetary stimulus and global economic growth will continue to be a dominant theme. As a consequence of the low interest rate environment, the search for yield will remain a powerful investment theme, ie cash and government bonds remain unattractive, which in turn could see global equities grind higher. However, from a longer term perspective, we are mindful that the maintenance of interest rates at artificially low levels over an extended period of time could unleash significant distortions in the global economy and ultimately lead to a sharp downturn in economic growth and financial markets.

Given the above considerations, we believe that our Fund strategy remains appropriate - a mix of defensive companies (that can prosper in tough economic circumstances), together with exposure to attractively priced global cyclicals.

The Fund currently trades on a forward rolling Price/Earnings (P/E) ratio of 11x and a dividend yield of 3.1%, with an anticipated 12-month forward earnings per share growth of 17%.

The FTSE/JSE All Share (ALSI) gained 1.2% in March. Healthcare (+8.6%) was the best performing industry group, followed by Oil & Gas (+6.1%). As a consequence, our holdings in Mediclinic (+12.8%) and Sasol (+6.1%) aided our performance. Basic Materials (-3.7%) and Telecoms (-5.6%) declined over the month, with our holdings in Amplats (-10.1%), Anglo American (-6.1%) and MTN (-5.2%) detracting from our overall performance.
Over the first quarter, the ALSI recorded a total return of +2.5%. In terms of sector performance, Industrials (+6.3%) outperformed, followed by Financials (+5.9%), while Resources (-6.0%) lagged the broad index - a pattern well established over the past few years. The Resources sector continues to be weighed down by an uncertain demand picture, weaker commodity prices, volatile labour relations, supply disruptions and huge cost inflation.

The optimism, evidenced in rising equity markets, may seem at odds with the stream of economic newsflow, particularly in Europe. The turmoil in Cyprus is a reminder that many of the problems that sparked the euro crisis remain unresolved. While a meltdown of the Cypriot financial sector was prevented (by taxing deposits), it came at a huge cost. Savers elsewhere in the euro area may now begin to doubt whether their own assets are secure.
On a positive note, the cyclical outlook for the US economy remains sound as evidenced by a combination of a strengthening housing market and improving labour picture (the unemployment rate fell to 7.7% in February, its lowest level since December 2008).
Conditions in China also point to expansion - the government’s official Purchasing Managers' Index rebounded to 50.9 in March from 50.1 in February, the fastest pace in 11 months.
In South Africa, the outlook remains challenging on the back of an elevated current account deficit, slow growth and a weakening currency. South Africa’s current account deficit in the fourth quarter measured 6.5% of GDP (close to a four-year high). In addition, the country continues to be plagued by labour unrest. Both of these have spurred recent rand weakness (the rand depreciated 8.1% against the US dollar during the first quarter of 2013). Despite the sharply weaker rand, and thus threat to the inflation outlook, the MPC kept rates on hold at 5% and they continue to signal flat rates going forward.

As we consider the outlook for the second quarter, the Fund continues to represent a mix of defensive companies (that can prosper in tough economic circumstances), together with exposure to attractively priced global cyclicals. The Fund currently trades on a forward rolling Price/Earnings (P/E) ratio of 11.6x and a dividend yield of 3.3%, with an anticipated 12-month forward earnings per share growth of 17%.