Market review

Global equity markets recovered strongly from the sell off at the end of last year. The S&P 500 in dollars gained 13.1% the MSCI World gained 11.9% and the MSCI EM lagging slightly gained 9.6%. The most surprising development in markets was the sharp rally in long dated developed market government bonds; the yields on US 10yr maturity bonds declined from 2.69% at year end to 2.41%. The yield on 10yr German bonds declined from 0.24% to -0.07%.

The US Congress and President Trump ended the longest government shutdown in American history on 25 January 2019 without reaching consensus over the funding amount for an expansion of the US Mexico border wall. In the UK Prime Minister May failed to gain sufficient support for her Brexit deal, but did manage to persuade European leaders to postpone the Brexit deadline until mid-April. In the last week of March the UK parliament voted on no less than eight options and has yet to find majority support for any proposal. As things stand it looks like the UK might leave the EU on 12 April without a deal.

South African markets lagged behind global equities gaining 6.8% in rand (marginal rand weakness detracted 0.9% for the US dollar based investor). SA bonds delivered surprisingly strong performance gaining 3.4% over the quarter.

Mr Mboweni delivered the Medium Term Expenditure Framework (MTEF) in February. Government revised growth forecasts lower, made no adjustment to tax brackets despite inflation and promised R23bn a year to Eskom to help it restructure its operations. The sustainability of government finances depends on the ability of the economy to achieve projected growth rates. The Eskom load shedding experienced in the first quarter makes it that much harder to achieve. Already, in March government revenue statistics showed much larger than expected shortfalls. Moody’s, despite the obvious challenges, did not downgrade SA government debt to junk.

Performance

Since the fund’s inception the FTSE/JSE Capped All Share Index delivered 10.0%, domestic property (represented by the FTSE/JSE SA listed property index) declined 12.9% and SA cash paid 13.8% in rand. The rand/dollar exchange rate deteriorated from R13.10 to R14.48, representing a decline of 10.5%. This weakness assisted the performance of offshore assets; the S&P500 in rand closed 29.9% higher while the MSCI EM lagged gaining 16.3%.

Over the first quarter of 2019, all assets - onshore and offshore - delivered positive returns to the rand investor. Offshore asset have delivered returns well in excess of what has been available on domestic assets.

Owning assets exposed to different macro-economic risks and rewards is how one achieves diversification. This means that not all assets held by the fund can deliver returns in the same environment. A diversified portfolio means reduced volatility and capital stability; one of the main aims of the fund.

Noteworthy allocations

-We remain committed to maintaining the 25% offshore allocation.
-We have no intention of acquiring long dated developed market debt. We prefer to roll shorter dated cash investments which offer lower returns, but reduce the risk of capital losses.
-We are evaluating our domestic asset allocation given the difficulties load-shedding imposes on the SA economy.

Outlook

In the absence of major regulatory reform, South Africa will follow where global markets lead.

Market review

In US dollars, equity markets had a tough quarter. Unfortunately South Africa continued to lag; outperforming only a handful of emerging market equity indices. The MSCI All Country World equity index closed lower. Surprisingly, emerging markets performed relatively better.

Finance Minister, Nhlanhla Nene resigned and was replaced by previous central bank governor Tito Mboweni. The markets responded with some enthusiasm to the appointment. Mr Mboweni then delivered the Medium Term Budget Policy Statement (MTBPS) a few short weeks later. Salient features include downwardly revised growth forecasts, slippage on projected deficit and debt targets over the medium term – a result of lower revenue projections and a reprioritisation of public spending (while maintaining the expenditure ceiling).

The South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) raised the repo rate by 0.25% highlighting rand depreciation, electricity price increases and higher international oil prices. Markets expect the MPC to raise the repo rate to 7.5% over the next 18-24 months. S&P maintained a stable outlook and affirmed South Africa’s local currency debt rating.

International trade tensions remained elevated and data releases indicated that Chinese growth might be slowing.

Performance

The fund was launched on 2 May 2017. Since the fund’s inception the FTSE/JSE Capped All Share Index delivered 2.0%, domestic property (represented by the FTSE/JSE SA listed property index) declined 14.6% and SA cash paid 12.5% in rand. Marginal rand weakness (since inception) - the rand/dollar exchange rate deteriorated from R13.34 to R14.35, representing a decline of 7.6% - assisted the performance of offshore assets. The S&P500 in rand closed 12.8% higher while the MSCI EM lagged modestly gaining 5.1%.

Over the last quarter of 2018, only bonds and cash assets – onshore and offshore – delivered positive returns to the rand investor.

As we wrote at the end of the previous quarter, markets have provided little opportunity for outsized returns.

Owning assets exposed to different macro-economic risks and rewards is how one achieves diversification. This means that not all assets held by the fund can deliver returns in the same environment. A diversified portfolio means reduced volatility and capital stability; one of the main aims of the fund.

Noteworthy allocations

-We remain committed to maintaining the 25% offshore allocation.
-We have no intention of acquiring long dated developed market debt. We prefer to roll shorter dated cash investments which offer lower returns, but reduce the risk of capital losses.
-We have again reduced our underweight equity allocation domestically. We continue to buy exposure to SA Inc and emerging markets following recent poor performance.

Outlook

In the absence of major regulatory reform, South Africa will follow where global markets lead.

Market review

In US dollars, equity markets had a better quarter. Unfortunately South Africa continued to lag; keeping company with a handful of countries. The MSCI All Country World Index closed higher, but emerging markets continue to lag.
High frequency data releases throughout the quarter indicated that economic activity remained muted. This was confirmed by another weak GDP print showing that the South African economy is technically in recession (defined as two consecutive quarters of declining output).

The Jobs Summit concluded at the end of September, with a renewed commitment by government and social partners to create 275,000 jobs per year. Interventions aimed to improve growth include:

- Boosting domestic demand through additional local procurement by Government - Manufacturers encouraged to explore and identify import replacement opportunities - Adopting a more aggressive approach to exports to grow domestic productive capacity - Disbursing funding to Black enterprises within the industrial sector
- Increased public/private collaboration on infrastructure to crowd-in private sector expertise and investment
- Continued support for the IDC towards distressed firm

Performance

Since the fund’s inception in May 2017 the FTSE/JSE Capped All Share Index delivered 7.2%, domestic property (represented by the FTSE/JSE South Africa Listed Property Index) declined 11.1% and South African cash (represented by the STeFI) paid 10.5% in rand. Marginal rand weakness (since inception) assisted the performance of offshore assets - the rand/dollar exchange rate deteriorated from R13.34 to R14.14, representing a decline of 6.0%.

Markets have provided little opportunity for outsized returns.

Noteworthy allocation
- We remain committed to maintaining the 25% offshore allocation.
- We have no intention of acquiring long-dated developed market debt. We prefer to roll shorter dated cash investments which offer lower returns, but reduce the risk of capital losses.
- We retain an underweight equity allocation domestically but have increased our exposure to SA Inc. and emerging markets, following recent poor performance.

Outlook

In the absence of major regulatory reform, South Africa will follow where global markets lead.