Global markets

Global equity markets performed well over the quarter. On a total US dollar return basis - the S&P 500 Index gained 9.0%, the MSCI World Index 8.6% and the MSCI Emerging Markets Index 11.8%. The surprising decline in long dated developed market bond yields that started in Q1 reversed in the final quarter of the year. Yield on US 10 year maturity government bonds increased from 1.7% at the end of Q3 to 1.9% at the end of Q4. The yield on 10 year German bonds, which had fallen to -0.6% at the end of Q3, closed the year at -0.2%.

In December President Trump became the third president since America’s founding to be impeached. Nearly all Democrats voted in support of the two articles of impeachment - abuse of power and obstruction of Congress – but they failed to attract Republican support. As Republicans control the Senate and a two-thirds majority would be required to remove Trump from office, a conviction seems unlikely.

In the UK election in December, the Conservative Party secured the biggest majority since 1987 - an unexpected landslide after relentless campaigning on the promise to “Get Brexit Done”. The majority will give Prime Minister Boris Johnson greater leeway to steer future trade talks.

South African markets SA markets outperformed emerging market peers. The FTSE/JSE Capped Swix Index delivered a total return of 5.3% in rand. US dollar investors gained an additional 7.5% as the rand strengthened from R15.13 at the end of Q3 to R13.99 at the end of Q4. SA bonds delivered 1.9% in rand to investors during the quarter.

In October, the Medium-Term Budget Policy Statement (MTBPS) projected a large and sustained increase in government’s debt to GDP ratio as large fiscal deficits remained. This reflected a material deterioration relative to the projections published by National Treasury in February. Treasury warned, “…final adjustments will be announced in the 2020 Budget. These measures require difficult decisions that will affect the economy and the distribution of public resources. The short-term costs, however, are outweighed by the need to ensure sustainable public finances”. Following the release of the MTBPS, Moody’s downgraded SA’s credit outlook to negative (but did not cut the rating to junk). Moody’s said that the change “…reflects the material risk that the government will not succeed in arresting the deterioration of its finances through a revival in economic growth and fiscal consolidation measures. The challenges the government faces are evident in the continued deterioration in SA’s trend in growth and public debt burden”.

Performance

Since the fund’s inception in June 2017 the FTSE/JSE Capped SWIX Index delivered total returns of 5.3%, the FTSE/JSE SA Listed Property Index declined 12.5% and the STeFI Composite Index paid 20.0% in rand. The rand/US dollar exchange rate deteriorated from R13.10 to R13.99, representing a decline of 6.8%, which added to the performance of offshore assets. In rand terms, the S&P 500 Index closed 44.4% and the MSCI Emerging Markets Index gained 17.5%.

Portfolio review

We remain committed to maintaining the fund’s 25% offshore allocation. The return prospects for long dated developed market government bonds remain very unattractive. We prefer shorter dated cash investments offshore that offer a similar level of return but without the asymmetric downside risk.

The offshore exposure favours developed market assets, but the fund also has a relatively large holding in the emerging market equities index. The emerging market allocation underperformed our expectations in unusual circumstances. Throughout 2019 resource stocks and commodities delivered exceptional returns, but emerging markets – usually highly correlated with these assets – delivered relatively modest performance. This unexpected outcome weighed on the performance of the fund. The fund’s domestic equity component outperformed in the first half of the year, but gave back some of the outperformance during the second half of the year as domestic gold and platinum mining shares (which we have minimal holdings in) experienced large price gains.

We are cautious about return prospects so the fund remains defensively positioned.