September proved to be a relatively resilient month for global equity markets in the face of a string of negative news. Escalating trade-war tensions between the US and China, the start of efforts to impeach President Trump, Brexit uncertainty in the UK and political instability in Europe (particularly in Italy), were not enough to dampen investor sentiment as developed and emerging markets both closed the month in the black. In the US, President Trump's administration announced that it was considering delisting Chinese companies from US stock exchanges. The move formed part of a broader effort to limit US investment in Chinese companies. In keeping with market expectations, the US Federal Reserve cut interest rates by 25 bps, citing the prolonged US-China trade war and weak global economic growth as ongoing risk factors. Markets however, were disappointed as the Fed downplayed expectations of further interest rates cuts. In the UK, the Supreme Court ruled Prime Minister Johnson’s move to suspend Parliament was illegal, triggering calls from opposition parties for him to step down. In the EU, outgoing ECB president Mario Draghi announced that the central bank would cut interest rates by 10bps (below market expectations of a 20bp cut) and would continue to keep rates at accommodative levels until inflation showed signs of approaching the 2.0% target. China, meanwhile, filed a lawsuit with the World Trade Organization after the US imposed an additional 15% tariff on US$300bn worth of Chinese imports from 1 September. In retaliation to the tariff increase, China levied new duties of between 5-10% on US$75bn worth of American imports, including crude oil.

Looking at global market returns (all in US$), the MSCI All Country World Index delivered 2.2%, the Bloomberg Barclays Global Aggregate Bond Index returned -1.0%, while the EPRA/NAREIT Global Property Index REIT posted 2.7% in September. The rand strengthened 1.1% against the euro and 0.1% against the dollar, but weakened 1.1% against the pound sterling.

In US dollar terms, exposure to US, Japanese and European equities contributed to performance in September, while exposure to South Korean and Indonesian equities detracted from value. In terms of fixed income, US dollar-denominated investment grade bonds and European corporate bonds detracted from performance during the month.

After the sharp losses suffered at the end of 2018, investors were able to take heart in the first quarter (Q1) of 2019 with markets rebounding as a few negative factors appeared to reverse themselves. Although evidence of slowing global growth continued to mount, global equities and bonds rallied strongly after the US Federal Reserve announced a substantial change of view and decided to pause (and perhaps even end) its interest rate hiking cycle. At the same time, other developed market central banks undertook more growth-supportive moves, and considerable progress was reportedly made in resolving the US China trade dispute. On the negative side, an even more chaotic Brexit environment and the uncertainty engendered by Trump's unpredictability remained bearish factors for markets. Emerging markets also benefitted from the more bullish sentiment and the Fed's rate pause, but some like Turkey and Venezuela faced idiosyncratic challenges.

In the US, it was the Fed's more dovish rate stance that proved to be the key for turning last year's losses into this quarter's gains. The Bank emphasized that it would be "patient" when it came to further raising interest rates, given that the case for hiking had weakened in the face of slowing global and US growth. This eased fears that inexorably higher rates could choke off growth. US GDP growth for Q4 2018 was revised down to 2.2% (q/q annualised) from 2.6% previously, sharply lower than the 3.4% in Q3 2018. Dismal US retail sales data were a key highlight. Not only did the Fed opt to keep rates on hold at its January and March FOMC meetings, but on 20 March its "dot plot" showed it had slashed its own interest rate expectations from two 25bp rate hikes in 2019 to zero, and only one 25bp hike in 2020. This was very positive for equities, and also helped push longer-dated US Treasury bond yields lower, such that the yield curve "inverted" for the first time since 2007 (where 3-month interest rates were higher than those for 10-year bonds). Some interpreted this as a sign of a looming recession. For the quarter, the US 10-year Treasury yield fell from around 2.68% to end at 2.41%.

Adding to the general positive news was the end of the 35-day US government shutdown in January, and that good progress was reportedly being made in the US-China trade negotiations to avert higher tariffs and a full-blown trade war. This was particularly beneficial for the global growth outlook, especially for trade-dependent countries like China, Japan and South Korea, and helped push the US dollar stronger for the quarter against most other currencies (although not the yen). For the quarter, the US S&P 500 returned 13.6%, the Nasdaq 16.9% and the Dow Jones Industrial 11.8%.

In the UK, agreement was reached with the EU to extend the Brexit deadline into April, and PM Theresa May effectively lost control over determining a way forward, forced to hand over to Parliament. However, MPs rejected every possible option for structuring the future relationship, worsening the chaos within government. Meanwhile, UK GDP growth slowed to 1.4% (q/q annualised) in Q4 2018 from 1.6% previously, with the EU area equally pedestrian at 1.4% for the quarter. This deteriorating growth was a factor in keeping interest rates on hold across both regions, as well as in the US Fed's interest rate view. The European Central Bank even introduced a new cheap longterm loan plan for banks to help avoid further deceleration, as Germany's manufacturing data was negative for three months in a row. The UK's FTSE 100 returned 11.6% for the quarter, while the Dow Jones Eurostoxx 50 produced 10.2% (both in US$).

During the quarter it was revealed that the Japanese economy returned to growth in Q4 2018 after a contraction in Q3, although exports remained sluggish amid trade uncertainty and the slowdown in Chinese growth. Japanese GDP is forecast to reach around 1.0% in 2019, supported by the Bank of Japan's ongoing easy monetary policy, but expected to be hit by a new consumption tax on spending and consumer prices to take effect later in 2019. For Q1, the Nikkei 225 returned 6.5% in US$. In China, meanwhile, 2018 GDP growth came in at 6.6%, its weakest in 28 years but meeting consensus expectations. The government's new 2019 growth target is even lower at 6.0%-6.5%. There was, however, renewed optimism amid the positive US-China trade news; government pro-growth measures, including easier bank credit, took effect; and manufacturing activity accelerated - China's PMI recorded its highest rise since 2012. This helped the MSCI China post a return of 17.7%, making it the best performing large emerging market in Q1.

Among other emerging markets, strong performers for the quarter included the MSCI Russia with 12.2% and Brazil's Bovespa at 8.0%. The weakest markets were the MSCI Turkey (-3.0%), South Korea's KOSPI 200 (3.4%) and the MSCI South Africa (4.6%), all in US$.

The price of Brent crude oil recovered sharply in Q1 2019 to gain 27%, ending March at around US$67 per barrel. This was attributable to additional sanctions on Iran being considered by the US and a halt in operations from a key Venezuelan export terminal. Looking at other commodities, gold gained 0.8%, palladium was up 9.5% and platinum rose 6.8% for the three months. Industrial metals prices were broadly higher, especially nickel (21.6%) and zinc (19.1%).

Despite US dollar strength, the rand lost only 0.5% versus the greenback, but 2.1% against the UK pound sterling, while gaining 1.3% against the euro, which was hit by growth concerns and more dovish interest rate expectations.

PERFORMANCE

The fund produced a return of 8.8% (net of fees) for the first quarter of 2019, underperforming its benchmark by 0.9%. This new unit trust does not yet have a one-year track record. The fund benefited from a strong equity performance over the quarter, however overweight positions to selected emerging markets detracted from performance. Also contributing to performance over the period was the fund exposure to emerging market bonds and US investment grade credit.

STRATEGY AND POSITIONING

The fund remains overweight equities and underweight bonds (and more cautious on developed government bonds compared to the benchmark), as the size of the equity risk premium remains the most obvious opportunity on offer across the global investment landscape today. Over the quarter the fund decreased its exposure to Russian equities in favour of US equities on the view that prices have peaked in the former, particularly as sentiment around sanctions has improved.

So far in 2019 we have seen an unwinding of the exaggerated risk aversion that took hold in late 2018, although this may not continue. At the moment the most compelling opportunities still appear to be in equities. As a result, the fund remains diversified across developed and emerging markets.

While we continue to see low inflation rates in both developed and emerging markets, and strong employment levels - with wage growth also starting to pick up - there has been weak data from a trade and manufacturing perspective. The easing of pressure from rising interest rates coming from the Fed - and other central banks - is likely to be a major driving force for markets prospectively. In this regard, we will continue to monitor changes in the fundamentals and prevailing asset valuations when deciding how to best position the fund in the future.