Nedgroup Inv Balanced Comment - Aug 17 - Fund Manager Comment22 Sep 2017
Emerging markets continue their upward march
Emerging markets continued their outperformance of developed markets in August. The MSCI Global Emerging Market Index gained 2.1% versus the MSCI World Index, which just managed to generate a positive return of 0.2%. Year-to-date the MSCI Global Emerging Market Index has delivered a dollar return of 28.6%, boosted by a strong performance from Asia.
South Africa’s equity market returns have been generated by very few shares
The FTSE/JSE All Share Index (ALSI), buoyed by positive emerging market sentiment, added 2.6% for the month. The resources sector delivered the best performance for the month, returning 5.1% on the back of buoyant commodity prices. SA financial and industrial indices added 2.1% and 2.0% respectively. Superficially, while the 13.6% performance from the ALSI year-to-date appears impressive, this return has been generated by very few stocks i.e. the market breadth has been very narrow. Year-to-date Naspers, Richemont, BHP Billiton, Anglo American and Mondi have contributed 79% of the ALSI’s 13.6% return.
Locally, equities are the best performing asset class year-to-date
Year-to-date the ALSI is up an impressive 13.6%, outperforming all other asset classes. By comparison the Listed Property Index, the All Bond and cash have delivered returns of 6.9%, 6.6% and 5% respectively.
Global growth remains robust, emerging market risk asset appetite remains high
Despite the stronger global growth environment, developed market yields remain low as a consequence of a benign inflation outlook. This continues to feed foreign appetite for emerging markets risk assets, especially in the fixed income markets. This liquidity inflow has strengthened emerging market currencies and lowered their bond yields. The rand has been a significant beneficiary of this trade. This, however, creates more risk over the longer term if for whatever reason these inflows cease or even reverse.
South African economy exits technical recession, but concerns remain
The South African economy moved out of a technical recession, following two quarters of negative growth. Annualised GDP growth improved to 2.5% quarteron- quarter, following the first quarter’s decline of 0.7%. The recovery in growth was off a very low base and was driven mainly by improved performances from the agriculture, forestry, fishing and mining industries.
Despite the second quarter recovery, growth expectations for the full year are still likely to be weak, with expected growth of less than 1.0%. Excluding the primary sectors, second quarter GDP growth would have been 1.5% off a weak base, which does not suggest a broad-based recovery in activity levels. Activity levels in the manufacturing, retail and finance sectors remain weak, and are vulnerable to a further potential confidence shock given the current uncertain socio-political environment.
Expect further interest rate cuts from the South African Reserve Bank (SARB) The combination of a stronger rand and falling food inflation will see headline inflation well below the SARB’s targeted band. The SARB has already started cutting interest rates, and given the lower inflation outlook and weaker underlying economic momentum, we are likely to see a further 75 bps of rate cuts over the cycle.
South Africa facing higher budget deficits, big tax hikes to come
We have been highlighting our concern around the potential for a disappointment on government tax collections, given the weak local economic environment. July saw the government announce a record breaking fiscal deficit of R92bn, suggesting we could be facing a much larger fiscal deficit for the year. We expect the tax shortfall could be as much as R50bn for the year, which implies a much larger public sector borrowing requirement. As a result, we are likely to face further punitive tax hikes as government attempts to shore up its revenues. The Medium-Term Budget Policy Statement in October will give us more clarity on the extent of the potential shortfall.
Management Company Switched - Official Announcement02 May 2017
The fund switched Management Company from MET Collective Investments Ltd. to Nedgroup Collective Investments (RF) (Pty) Ltd. on 01 March 2017
Fund name change - Official Announcement02 May 2017
The Truffle MET Balanced fund has changed name to the Nedgroup Investments Balanced fund on the 01 March 2017.