On the 31st of December 2019 stock market around the world closed out one of their best years over the past decade. After ticking up 0.3% on the final trading day of the year, the S&P 500 index gained approximately 30% in 2019, its best year since 2013, beating the FTSE All-World index, which was up 24% in US dollars for its strongest result since 2009. These good returns were almost inconceivable just 12 months ago when fears over rising interest rates and slowing global growth provoked an approximate 15% market sell off of US blue-chips in the final month of 2018. Come the beginning of 2019, many money managers were predicting a full blown global recession. Fortunately, these fears proved overblown primarily as a result of one of the most notable monetary policy pivots in recent memory – according to data from CBRates (a central-bank tracking service), 56 central banks cut rates 129 times in 2019. Monetary policy was loosened in major economies such as the U.S. and the Eurozone, as well as the biggest emerging markets, such as China, India, Russia and Brazil. This monetary easing, which was the opposite to what economists anticipated at the start of 2019, pushed interest rate expectations significantly lower — a shift that prompted a positive re-pricing of asset classes across the board. This included SA equities which gained 12% during the year, with resources (up 23%) and media giant Naspers (up 16%) leading the way.

SA bonds also performed well (SA All Bond Index up 10%) aided by a diminishing supply of bonds globally offering decent yields. Twenty years ago, well over half of the global bond market boasted yields in excess of 5%. Today, that proportion has reduced to 3% - the lowest share on record (according to ICE Data Indices). The current yield of the SA government 15 year bond is 9%.

Notwithstanding an improved performance in 2019, it should be noted that SA investments continue to disappoint relative to offshore investments — a trend likely to continue as South Africa’s major growth impediments (policy uncertainty, load shedding, credit downgrades etc) have not been satisfactorily addressed as evidenced by historically low business and consumer confidence. This explains the Marriott Dividend Growth Fund’s relatively high exposure to quality dividend paying stocks listed on first world stock exchanges and locally listed Rand hedge stocks. An “overweight” position in companies like Nestle, Honeywell and Medtronic has served investors well. Over the last 3, 5, 7 and 10 years the Marriott Dividend Growth fund has produced favourable outcomes relative to peers, from both an income and total return perspective.

So, what to expect in 2020?

Many of the key questions from 2019 remain unanswered as we head into the new year: Are we still heading for a global recession?; What is next for the UK and Brexit?; Will the US/China trade war simmer down or boil over?; and, what will Trump do next? This uncertainty (which undermines investment) coupled with a grossly over indebted financial system suggests that the current environment of sluggish economic growth and low inflation will continue for the foreseeable future – a scenario which has clearly been priced into the yield curve as evidenced by a current market value of sub-zero (negative) yielding bonds in excess of $10 trillion dollars. This low growth/low inflation scenario is further entrenched by limited scope for additional monetary policy loosening.

As such, we remain of the view that the world’s finest dividend paying companies are likely to serve investors best in the years ahead and have maintained an approximate 25% exposure to these investments. Not only are the dividend yields of high quality companies like Nestle and Coke significantly higher than bond yields, but their “defensive” products and strong balance sheets also suggest they will continue to increase dividends (the primary driver of capital growth) despite tough economic conditions. Taking into consideration the SA listed Rand hedge stocks in the portfolio the fund’s total offshore exposure is approximately 35%.

From a South African perspective, a low growth environment will make it increasingly difficult for the country to achieve the level of economic growth required to reduce unemployment, improve the country’s fiscal position and hence prevent a credit rating downgrade by Moody’s. As such, consumer and business confidence is likely to remain suppressed along with dividend growth.

To ensure an acceptable outcome from the fund’s domestic equity exposure we have taken the following actions:
1. Chosen defensive industries and high quality stocks
2. Increased the number of stocks we hold to improve diversification
3. Emphasised income yield over income growth to minimise earnings growth “disappointments” (when actual results do not live up to expectations)
4. Identified companies that have earnings “levers to pull” such as increasing private label penetration, squeezing suppliers, and benefitting from consumer down trading

Looking ahead, we anticipate that the Marriott Dividend Growth Fund will continue to hold up well in difficult conditions given: 1) the positioning of the portfolio and, 2) an investment style which is well suited to the current macro-environment as it emphasises quality - companies that are resilient to changing economics, politics and technology.