The Saffron SCI Large Cap Fund returned -8.68% for the quarter, with the benchmark (composite 95% Capped SWIX 40TR + 5% STeFI Call Index) returning- 6.19%, resulting in an underperformance over benchmark of 2.49% for the period.

The third quarter of 2019 was characterised by challenging and uncertain financial asset performance. Sovereign developed market Fixed Income and domestic Gold and Platinum miners performed well due in part to their perceived safe-haven attributes. Most other asset class performance was lacklustre over the period.

Developed Market central banks for the most part continued their cutting cycles with the Federal Reserve (-0.25%), European Central Bank (-0.10%) and Reserve Bank of Australia (-0.25%) leading the charge in the face of further deteriorations in global economic indicators. The third quarter, much like the past two years, was heavily impacted by global News events, such as continued trade negotiations between the US and China, political turmoil in Hong Kong and the bombing of Saudi oil fields.

Over this period, the US S&P500 Index returned 1.69%, the Shanghai Composite returned -1.35% and the Euro Stoxx 600 returned a modest 2.69%. Domestically equities suffered their worst quarter since 2011, with the JSE All Share returning - 4.57% and the more domestically focussed Capped SWIX 40TR returning -6.40%.

On the fixed income side, the US10 year bond strengthened with yields falling by 34 basis points to 1.67% over the period while the 10-year Bund also strengthened by 24 basis points to -0.57%. The spread between the US10 year and Bund 10y remains above 2%, indicating a continued belief in fundamentally different economic outlooks for the two regions. Domestically, South Africa’s 7y R186 bond weakened, ending the quarter higher by 23 basis points but providing a total return of 0.85% over the period. This result for domestic fixed income was scarcely unexpected given the continued deterioration in the South African fiscus however is best explained by the impact of lower global rates brought about by developed market central bank dovishness.

In Commodity markets, Gold and PGM’s delivered solid performance with Gold up 4.33% to multi-year highs while spot Platinum, Palladium and Rhodium returned 5.97%, 9.06% and an enormous 58.21% respectively. Rhodium, the most rare of the Platinum Group Metals and whose primary use (80% of total production) is as a catalytic converter in automobiles. Conversely, growth commodities performed poorly with Iron Ore, Copper and the General CRB Metals Index down 10.04%, 5.22% and 7.24% respectively. Brent crude ended down 8.67% for the quarter despite the attack on the Saudi oil facility.

Domestically, the Rand weakened by 7.70% against the US Dollar (while concurrently weakening against other DM currencies), providing some support to rand hedges. Other EM currencies were also broadly weaker for the quarter with the Indian Rupee and Brazilian Real weakening by 2.67% and 7.96% against the US Dollar. The Turkish Lira bucked the trend however, strengthening by 2.43% against the greenback.

In the global credit space, the Markit iBoxx USD Liquid High Yield Index gained 0.83% over the period. The VIX Index, which measures risk sentiment, traded slightly higher at the end of the quarter at 16.24 from 14.06.

The J.P. Morgan Emerging Market Bond Spread traded slightly higher at 863.81 at quarter end (up 0.90%). The JPM EMBI spread traded at 399.59 (up 2.90 bps). South Africa’s 5-year Credit Default Swap spreads widened by 30bps to 193.43 bps, while Emerging Market peers’ spreads tightened. Russia’s spread traded at 85.94 (- 24 bps), followed by Turkey at 357.98 (-13 bps) and Brazil at 136.54 (-11 bps).

South African equity performance was broadly similar between the main indices. The FTSE/JSE All Share returned -4.57% while the fund’s 95% benchmark, the Capped SWIX40, returned -6.40%. The primary reason for this small difference in performance being the depreciation in the Rand over the period, assisting the dual listed stocks.

In a difficult quarter, the fund took profit and closed out on three positions which were all biased towards rand strength while maintaining its other positions that are responsive to a variety of global macro factors. Current sector exposures include Energy, Industrials, Domestic Property, Logistics, Domestic consumers and Banking.

We expect a moderate reprieve in risk assets due to a less-negative outlook for the global economy. The market will continue to pay close attention to US-China trade talks and further central bank action in the light of some further deterioration in specific US and Global economic indicators.

The Saffron SCI Large Cap Fund returned 2.57%, with the benchmark (composite 95% Capped SWIX Top 40 Total Return + 5% STeFI Call Index) returning 3.41%, an underperformance of 0.84% for the period, with the fund down against benchmark by 0.7% year-to-date.

The second quarter of 2019 was led by expectations on global central bank policy decisions, outlooks for structurally lower growth and inflation expectations and US China trade wars negotiations.

Global central banks again dominated the direction of capital flows this quarter, with the perception of the beginning of more accommodative monetary policy playing a major role in asset allocation decisions - clearly seen through movements in the US 10-year (down from 2.41% to 2.01%) and the German 10 -year Bund (- 0.07% to -0.33%). The spread between these two benchmark rates continues to widen, indicating much diverging investor expectations between Europe and the United States.

The Australian central bank led the cutting cycle, reducing their policy rate by 0.25%. The Bank of Japan and the Bank of England kept rates unchanged while the latest European Central Bank meeting (and Draghi's last) indicated a willingness to loosen monetary policy further. In the US, market participants have recently begun pricing in at least two 0.25% rate cuts from the FED, likely in July and September respectively. This after the FED removed their 'patient' stance from their latest market report and indicated an unease with such low breakeven inflation expectations for the future.

Asset class returns were broadly mixed over the quarter: The MSCI World Equity Index provided a total return of 4.18% with the MSCI EM Equity Index returning only 0.69% over this period. Chinese equities gave back some previous quarter gains (Shanghai Composite Index returned -2.41%) and lost ground to the S&P 500 Index (4.30%) over the quarter.

A lack of risk appetite for emerging markets saw EM Credit unchanged with the JP Morgan EMBI Plus Sovereign Spread Index unchanged over the period at 405 points while the domestic ALBI (All Bond Total Return Index) returned a more modest 3.70% on the back of consistent R186 support. In the global credit space, the Markit iBoxx USD Liquid High Yield Index gained 1.54 % over the period. The VIX Index, which measures S&P 500 risk sentiment, traded slightly higher at the end of the quarter at 15.08 from 13.71.

Commodity returns were reversed during the second quarter. The CRB Commodities Index returned -4.3% (+4.2% in the previous quarter), with the CRB Metals Index as the biggest loser at -13.3% (up 8.0% in 1Q19). The CRB Livestock Index returned -7.6% (previously +8.9%). Brent crude oil prices traded at USD66.55 at quarter-end (down -2.7%). Oil jumped to a five-week high after Saudi and Russia signalled their support for an extension of OPEC+ output cuts and a US-China agreement to restart trade talks improved the demand outlook. The rand price per barrel traded at ZAR943.72, down -4.4% over the quarter as the rand appreciated by 2.9% against the dollar. Palladium (+11.0%) and gold (+9.07%) performed strongly, with copper (-7.8%) and platinum (-1.7%) losing.

Domestically, the Rand strengthened against the dollar by 2.86% over the quarter, with EM peers Brazil and Turkey strengthening and weakening by 1.80% and - 4.00% respectively over the same period. Internationally, the Trade Weighted Dollar Index weakened modestly by 1.19%. The Euro strengthened against the Dollar by 1.38% and the Pound weakened by 2.60%, dragging its feet due to the continued Brexit turmoil.

South African equities performed broadly in line with their global counterparts. The JSE All Share and Top40 Indices returning 3.92% and 4.61% respectively. The Capped SWIX Top40 Index to which the Saffron SCI Large Cap Fund is benchmarked, returned a slightly lower 3.22%.

Top performing bespoke Saffron relative sectors included Gold Mining (30.73%), Telecoms (14.42%) and Foreign Consumer (11.19%) with the major laggards being Energy (-16.66%), Foreign Property (-10.36%) and Domestic Consumer (-9.12%).

In a quieter end to the second quarter, the fund took profit on a number of sectors including Telecoms, Domestic Consumer and Domestic Retail which had benefitted from stronger ZAR and lower domestic interest rates. Detractors of value included the Healthcare, Paper and Pulp Industrial and Logistics sectors which continue to suffer from sector specific concerns.

The fund currently has no exposure to derivative positions.

The fund is positioned for a on-balance stronger Rand, similarly to Q1 with exposure to the Domestic Property, Domestic Consumer, Industrial and Logistics sectors.