Denker SCI Balanced Fund - Dec 22 - Fund Manager Comment22 Feb 2023
Market review
Global markets
2022 was a volatile year with global risk aversion heightened by a number of factors - including rising global inflation, interest rates and the risk of a global recession. However, uncertainty creates opportunity for the discerning investor and we have been through many of these cycles in the past. In 2022, the MSCI World Index fell by 18.1% in US dollar terms while the MSCI EM Index fell by 20.1%.
Other factors that contributed to the volatility were:
- The invasion of Ukraine by Russia in February. Following this, the US and Europe coordinated broad based sanctions against Russia and specific individuals.
- The US Fed raised interest rates and dropped the term ’transitory’ when discussing inflation. Markets remained volatile as participants tried to determine the prospects for the US economy, labour markets, inflation and the consequent interest rate trajectory.
- The UK experienced major upheaval, with three different prime ministers serving in a matter of weeks.
- Xi Jinping secured an unprecedented third time as the top leader of the Chinese Communist Party. Despite zero-Covid being a cornerstone of Xi Jinping’s policies, towards the end of the year the policy was relaxed (the potential normalisation of economic activity was welcome by markets).
- Europe agreed to impose taxes on imports based on the amount of green house gases emitted in the production of the goods. This is the first time that climate change regulation has been inserted into global trade rules. The bloc also proposed a cap to natural gas prices to shield consumers from the effects of higher energy costs.
The energy sector was by far the best performing sector for the year (gaining 46%). It was also the only sector that posted growth. Utilities (-4.6%), health care (-5.6%) and consumer staples (-6.1%) held up relatively well. Communication services (-37%), consumer discretionary (-33.3%) and technology (-30.7%) were the worst performing sectors.
South African markets
South Africa experienced unprecedented loadshedding in 2022 as the executive team tried to balance competing constraints. The CEO (under political pressure) resigned in the middle of December, whereafter he opened a case of attempted murder for suspected cyanide poisoning. The ANC announced the new ‘Top 7’ National Executive Committee (NEC) members. President Cyril Ramaphosa was comfortably re-elected as president of the party, deputised by Paul Mashatile. The remaining positions were won by Gwede Mantashe (chairperson), Fikile Mbalula (Secretary General), Nomvula Mokonyane (First Deputy SG), Maropene Ramokgopa (Second Deputy SG) and Gwen Ramokgopa (Treasurer General). Political commentators believe that the leadership is largely allied to Ramaphosa. Ramaphosa continues to be embroiled in the Phala Phala scandal. We remain concerned that the political leadership will be distracted by political infighting and legal battles and not the very urgent business of economic reform.
We believe that local political considerations should have limited impact on well diversified portfolios. The FTSE/JSE Capped Swix was up 4.4% in 2022. The SA resources index was the best performing index (up 8.6%), with financials up 6.9%, while industrials fell 3.7%. The small cap index was up 7.6%, while the large cap index rose by 3.9% and the mid cap index by 1.6%. The SA market performed better than most global markets, despite a weaker rand relative to the US dollar (it depreciated by 6.2% for the year). Performance South African assets delivered reasonable returns to investors in a tough year for global investors. In addition to the Capped Swix gaining 4.4%, SA government fixed income securities (the FTSE/JSE All Bond Index) gained 4.2% and domestic cash returned 5.2%. The FTSE/JSE SA Property Index closed largely unchanged (+0.5%). The rand weakened against a much stronger US dollar from R15.99 to R17.00 - this helped shelter the value of offshore assets for rand investors. The MSCI World Index lost 12.7% and the MSCI Emerging Markets Index lost 14.8% in rand.
Portfolio review
South Africa continues to disappoint in implementing growth enhancing structural reforms. In December we increased our exposure to government bonds as pricing became more attractive. We increased our exposure to inflation linked instruments within this portfolio, but our purchases favoured vanilla fixed income securities. Our offshore cash, which we hold to mitigate the effect of potential domestic policy mistakes on our domestic equity values, came in handy in early December when domestic news flow soured market sentiment on SA. We continue to hedge our exposure so that investors are not dependent on specific macro outcomes to generate returns from their investments in the fund.