During the third quarter of 2015, the Blue Quadrant MET Worldwide Flexible Fund generated a negative 3.81% return, while the MSCI World Index gained 4.42% on a total return basis (ZAR). Global equity indices generally lost ground in the third quarter, with investor confidence impacted by concerns over the extent and global impact of the slowdown in the Chinese economy. Slowing Chinese growth and growing supply contributed to a further decline in prices for most commodities, with oil prices dipping back and testing the lows from March.

Despite fairly robust growth reported by the US and Europe in the second quarter, some signs of a slowing in manufacturing activity in these regions as well as concerns over the impending Fed "tightening" cycle also dampened confidence. The apparent resolution of the Greek "crisis" in July along with souring investor confidence towards Emerging Markets, helped fuel a further recovery in the Euro, while EM currencies remained out of favour. The Rand was not left immune to these global currents and lost further ground during the quarter, touching a new record low of 14 to the US Dollar.

The decline in commodity and notably oil prices also predictably led to renewed concerns that the global economy was slipping back into a "deflationary" stagnation. These concerns coupled with a modest shift in tone from the Federal Reserve, inevitably also saw global bond yields in most developed markets decline once again. In the US the decline in longer-term duration bond yields and relative support for shorter-term yields (given expectations for a Fed tightening cycle) led to a renewed flattening in the yield curve.

The fund did not perform well during the third quarter, apart from the general decline in global equity indices, economic currents such as the flattening in the yield curve and general underperformance of more cyclical (economically sensitive) sectors, also undermined our relative performance. At present the fund's remains substantially weighted towards offshore equities and predominately US equities. Although valuations in the US market are not as attractive as was the case a few years back, we believe that the more cyclical or economically sensitive sector's that comprise the fund's major holdings remain on a relative basis very attractive.

In particular, US financials, a major theme in the fund's core composition remain attractively valued, with key holdings such as AIG, Bank of America and Voya Financial, continuing to trade at or below tangible book value. This is historically inexpensive and in particular relative to South African financials, such as Firstrand and Sanlam, trading 3x tangible book value.

Apart from the valuation underpin, the relative macro environments in the US and South Africa continue to diverge, negatively for South African financial assets and positively for US financials assets. We remain confident that the global economic recovery and particularly in the US remains intact and that as the unemployment rate continues to fall, the Fed will eventually be forced to start normalizing its interest rate policy or at least partially.

The prospect of a new interest rate tightening cycle in the US and a steepening of the US yield curve is also an environment historically supportive for US financials, in particular banks and insurers. Rising interest rates in the early phase of a new tightening cycle are often accompanied by widening bank interest margins as well as elevated credit growth. These two factors, in an environment of low or declining non-performing loans, should prove very supportive for bank earnings over the next 12 to 18 months and help explain our large weighting towards this sector at present.

Market Overview

During the second quarter of 2015, the Blue Quadrant MET Worldwide Flexible Fund generated a positive return of 1.2%, while the MSCI World Index gained 0.7% on a total return basis. Global equity markets showed some renewed divergence during the quarter, with the European market underperforming relative to US and Asian equity markets. A recovery in the Euro, coupled with a sell-off in European bonds after the spectacular rally in bond prices during the first quarter, undermined some of the positive tailwinds for European equities.

The Japanese stock market performed particularly well during the quarter, benefitting from both the weaker Yen and early signs of a more sustained recovery in the economy. Chinese equities continued their parabolic ascent until the final few weeks of the quarter, at which point the market sold off quite sharply. Global equity markets, including local indices, generally softened in the final weeks of the second quarter. This occurred as stronger US data sparked concern over the impending start of a tightening US interest rate cycle. The debt crisis in Greece resurfaced at the same time after the Greek government decided to call a referendum.

In South Africa, recent economic data points to a further slowdown in GDP growth from an already disappointing first quarter. The 4.8% y/y decline in June new vehicle sales points to a notable softening in consumption demand. This will raise doubts over whether the Central Bank can increase rates in a meaningful manner. The SARB is expected to raise interest rates by at least 25bps during 2015 as CPI accelerates back towards the 6% level. At this stage the acceleration is mainly due to initial inflationary pressures. Given the weak economic backdrop, as evidenced in the additional contraction in imports, it is likely that the Central Bank will remain on hold at present.

Fund Positioning and Outlook

The fund performed well in April and May, with returns driven by renewed weakness in the currency and gains in the fund's offshore equity holdings. In spite of this, the correction in equity markets, in tandem with a resilient currency, saw the fund give back some these gains in June. At present, the fund remains substantially weighted towards offshore equities and predominately US equities. Although valuations in the broad US market are not as compelling as a few years ago, the sectors that comprise the fund's major holdings remain very attractive on a relative basis.

In particular, US financials, a major theme in the fund's core composition remain undervalued, with key holdings such as AIG, Bank of America and Voya Financial continuing to trade at or below tangible book value. This is historically inexpensive particularly relative to South African financials such as Firstrand and Sanlam that are trading at 3x tangible book value.

Apart from the valuation underpin, the relative macroeconomic conditions in the US and South Africa continue to diverge, negatively for South African financial assets and positively for US financials assets. The prospect of a new interest rate tightening cycle in the US and a steepening of the US yield curve is an environment historically supportive for US financials, banks and insurers in particular. Rising interest rates in the early phase of a new tightening cycle are often accompanied by widening bank interest margins as well as elevated credit growth. These two factors, in an environment of low or declining non-performing loans, should prove very supportive for bank earnings over the next 12 to 18 months and justify our large weighting towards this sector at present.