Quarterly Commentary

Despite a brief drop in May, risk assets continued the positive trajectory in 2019, with global equity markets increasing 3.8% during the quarter in US Dollars, taking the year-todate return to 16.6%. The major themes influencing markets continued, with the threat of a global economic slowdown being countered by the major central banks reaffirming their accommodative monetary policy.

Markets started the quarter on a positive note as investor sentiment remained optimistic, underpinned by the more accommodative stance of major central banks and the prospect of a trade resolution between China and the USA.

This optimism was however tested in May, as trade tensions between China and the USA escalated once again following the Trump administration increasing existing tariffs on $200bn of Chinese goods from 10% to 25% while threatening to impose the same tariffs on an additional $325bn of Chinese goods. Tensions between the two largest nations were escalated further when the USA blacklisted Huawei, China’s largest telephone-network equipment company, citing security concerns.

The knock-on effect from this uncertain global trade environment is now beginning to reflect in global economic data, with manufacturing surveys showing weakness around the world, notably in US business surveys. These weak data points prompted the major central banks to reaffirm their stance on supporting their economies should conditions continue to deteriorate. In June, key individuals within the Fed (including the Fed president Jerome Powell) acknowledged that rate cuts may be required before the year-end to keep the economic expansion going. This led to renewed investor optimism, with markets quickly recovering the losses experienced in May.

In South Africa, politics took centre stage with the national election taking place in May.
The results were mostly in line with expectations, however, uncertainty remains regarding how much power Cyril Ramaphosa has within his own party to implement the policies required to improve the economic growth in South Africa. The urgency of these policies was evident with the Q1 GDP growth release, which showed that the economy shrunk by 3.1% on an annualised basis, the worst contraction since 2009. Despite this, the equity market still managed to outperform the Global and Emerging Market index during the quarter, increasing by 3.9% in Rand terms (6.3% in US Dollars).

The Ginsburg & Selby SCI Worldwide Flexible Fund generated a return of -1.2% in Rand terms over the quarter, underperforming the benchmark (+2.3%) and the ASISA Worldwide Multi-asset flexible peer group (+0.4%).

The underperformance during the quarter was as a result of the funds bias to offshore equities, which underperformed local equities over the period. Manager underperformance also detracted from performance, with a notable drop from the Contrarius Global Equity Fund and the Obis Global Balanced fund, which fell 13.8% and 3.5% respectively in Rand terms.

Going into Q3, we continue to expect increased volatility as markets weigh the positives from the major Central Bank’s support against the threat to global growth as a result of the prolonged trade tension. In this opaque environment and given the strong performance of global equities, we have slightly reduced the fund’s bias to global equities in favour of local fixed interest, which is currently offering attractive yields. After these changes, the fund will have approximately 71% exposure to risk assets and 58% in global assets.

The market's appetite for risk assets returned in the first quarter of 2019 as both a dovish Fed and optimism for a truce on trade between the US and China provided support for risk assets.

Global Equities (MSCI AC World Index) had the best quarterly performance since Q3 2010, increasing by 12.3% in US Dollars and recovering most of the losses suffered in Q4 2018. This performance was mostly driven by the heavily-weighted US equity market, which increased by 13.7% in USD, the highest quarterly return since Q3 2009.

During the quarter the US Federal Reserve changed their stance on their normalization path by keeping the federal funds rate unchanged, while slowing down the rate at which they reduce their balance sheet. This more patient approach was a response to concerns relating to prevailing global economic and financial developments, as well as muted inflationary pressures. The Committee no longer expects further rate increases in 2019 and could potentially discontinue the balance sheet reduction program in October, but cautioned that future adjustments still remain data dependent. This more dovish tone provided support for risk assets as it eased some of the market's concerns that future rate hikes may put further pressure on an already fragile global economy.

The trade talks between the USA and China continued to show signs of progress with delegates from both countries remaining optimistic. The friction between the two countries has been a major headwind for global trade and therefore any positive news remains supportive for risk assets. Despite this progress, there is still a lot of uncertainty surrounding certain critical industries, such as technology.

The positive sentiment towards risk assets also supported Emerging Markets, with the index increasing by 10% in US Dollars. This optimism on trade combined with continuing government support for the domestic economy supported the Chinese equity market, with the MSCI China index increasing by 17.85% in US Dollars.

In line with Emerging Markets, the JSE All-Share index also had a strong quarter, increasing by 8.0% in Rand terms. This positive return was however largely attributed to the strong performance of the larger rand hedge shares, as almost half of the companies listed on the JSE All-Share Index produced a negative return over the quarter.

Having initially appreciated against the major currencies at the start of the quarter, the Rand gave back all its gains following the Budget speech in February which once again highlighted the extent of the country’s fiscal problems. This dire fiscal position, combined with the anticipated impact of Eskom’s rolling blackouts, dimmed sentiment towards the country. The Rand ended the quarter at R14.42 to the USD and R18.79 to the GBP, reflecting a depreciation of 0.25% and 2.6% respectively.

The Ginsburg & Selby SCI Worldwide Flexible Fund generated a return of 9.6% in Rands over the quarter, outperforming the ASISA Worldwide Multi-Asset Flexible peer group (8.5%) and the fund's benchmark (8.4%).

The Fund’s bias toward global equities contributed to the outperformance relative to our peers and the benchmark, as global equities outperformed South African equities during the quarter. Notable strong performers during the quarter were the Contrarius Global Equity Fund and the Egerton Capital Equity Fund, which returned 17.1% and 16.0% respectively in Rands over the quarter.

Going into Q2, we continue to expect increased volatility as most of the concerns which led to the market fall in Q4 remain unresolved. While increased volatility can be painful over the short term, it creates opportunities which our skilled active managers are able to exploit.

We remain confident that the Fund's complementary blend of active managers offers the necessary diversified exposure to generate good real returns over the long-term, notwithstanding the high short-term volatility.

Quarterly Commentary

The third quarter of 2018 was positive for global risk assets, as the MSCI AC World Index increased by 4.4% in US Dollar terms. The index return, however, masks the divergent performances across the major regions as the heavily-weighted US market had its best quarterly performance since Q4 2013, while political uncertainty and trade concerns weighed on most of the other regions.

Robust corporate earnings and a thriving economy supported the US equity market during the quarter, which increased by 7.71% in US Dollar terms (i.e. S&P 500). The stable economic indicators and improved employment figures also allowed the Federal Reserve (Fed) to increase the federal funds rate by 25 basis points, taking the rate to 2.125%.

Emerging markets performed poorly over the quarter, as a slowdown in the pace of Chinese credit growth, fears over the vulnerability of certain economies to tighter US monetary policy and concerns about the potential impact of global trade tensions weighed on risk appetite. The MSCI Emerging Market Index declined by 0.95% over the quarter in US dollar terms. Year-to-date the Emerging Market Index has underperformed the developed market by 13.3%, with a total return of -7.4%, relative to the MSCI Developed Market (World) Index of 5.9%.

The negative sentiment towards emerging markets had a knock-on effect on South African assets, as foreigners sold R56bn worth of local bonds and equities during the quarter. The deteriorating local economy further exacerbated the outflows as GDP contracted for the second quarter in a row, putting South Africa into a technical recession. The outflows had an immediate impact on the Rand, which at one point during the quarter depreciated by 12.6% from the end of Q2 2018, to R15.43 to the US Dollar. The currency recovered some of the losses towards the end of the quarter to end at R14.15 to the US Dollar (i.e. a 3.2% depreciation from end of Q2).

The weaker Rand failed to benefit the local equity market during the quarter, as the index fell 2.2% in Rand terms. The negative sentiment to emerging markets impacted the heavily weighted Naspers share, which fell 12% during the quarter.

The SARB kept rates unchanged during the quarter despite the expected inflationary pressures from the weaker currency. The current inflation reading (+4.9%), constrained consumer and low economic growth led the SARB to defer the rate increase, which was a very close decision with 3 of the 7 members voting for an increase.

The Ginsburg & Selby SCI Worldwide Flexible Fund generated a return of +2.8% in Rands over the quarter, underperforming the ASISA Worldwide Multi-Asset Flexible peer group (+2.9%) and the fund's benchmark (+3.6%). The Fund return for the 1-year period ending 30 September 2018 was 8.2%.

The depreciation of the Rand had a positive impact on the aggregate return over the quarter owing to the Fund's bias towards global equity markets. A notable strong performer during the quarter was the Nedgroup Global Equity Fund, which increased by 10.5% in Rand terms.

As we enter the final quarter of the year, we expect the increased volatility to continue in this uncertain political and economic climate. The disparate performance across the major regions is beginning to create pockets of value for long-term investment, which we believe our managers have the skillset to exploit. During the quarter we took some profits on some of the offshore equity managers to bring the risk asset exposure back to the Funds strategic level (~70%). We remain confident that the Fund’s current asset allocation and complementary blend of active managers provide the necessary diversified exposure to generate long-term value for our clients.