Investment Manager Commentary
Foord Asset Management

Global equities (+0.1%) were largely unchanged, but US markets (S&P500 +1.8%) progressed as the US Federal Reserve’s nascent hawkish tenor boosted confidence in the US economy. Emerging markets (-3.7%) underperformed, weighed by the commodity exporters as commodity prices retreated and the dollar strengthened.

Blue chip Top 40 shares (+3.3%) led the FTSE/JSE ALSI (+1.8%) higher, while mid-caps (-5.7%) and small-caps (-3.6%), less exposed to rand hedge earnings, went backwards. Naspers soared 18%, while PPC declined 35% following a profit warning and rights issue.
Industrial counters (+5.1%) outperformed as beverage, tobacco and household goods benefitted from the weaker currency. The resources index (-3.8%) fell as commodity prices (excl. oil) retreated, while financials (-2.0%) followed the rand and bond prices lower.
Developed market bond yields posted double digit basis-point declines as inflation and growth expectations stayed low. However, US bonds underperformed after the Fed signalled its readiness for a second rate increase this cycle. In SA, the All Bond Index (-1.5%) fell as yields edged higher ahead of June’s S&P sovereign credit rating review.

Precious and industrial metal prices retraced recent gains as the dollar gained on prospects for higher US interest rates. Brent Crude (+3.2%) advanced to almost $50 a barrel on supply disruptions and lower US inventories.

The rand (-10.4% versus the US dollar) plunged as commodity prices slipped and prospects improved for higher US interest rates. This was compounded by continued political woes and fears for an imminent SA sovereign rating downgrade.

The fund managers have structured the Nedgroup Investments Stable Fund conservatively, prioritising short-term capital preservation, with high cash levels and an accumulating bond position as yields rise. Within SA equities, the preference is for non-resource rand hedge counters given the tail risks of a credit rating downgrade and weaker rand.

Global equity markets opened the year on the back foot. Developed markets (-6.0% in USD) and emerging markets (-6.5%) declined. The FTSE/JSE All Share Index (-5.5% in USD) didn't escape the market rout but Russia (-0.8%) and Turkey (+1.6%) outperformed their emerging market peers.

Gold (+5.2%) rallied after dovish comments from the US Federal Reserve and additional Japanese stimulus. Gold (+34.9%), platinum (+17.7%) and coal (+37.8%) miners bounced, but still lag the overall market over 12 months. Brent Crude slid sharply (-22.7%) as Iranian sanctions were lifted, driving commodity prices (ex-precious metals) lower.

Interest rate sensitive and consumer stocks (general retailers: -6.4%) sold off after the SARB raised the repo rate by 0.5% citing food-related inflation risks. The banking index (+0.7%) rebounded on the endowment effect.

Global bonds rallied as world inflation forecasts dipped amid the looming Japanese negative rates policy and precipitous oil price decline. South African 10-year bond yields fell sharply as the yield curve flattened, pushing the All Bond Index to a 4.6% return in the month.

Tighter monetary policy and falling consumer demand should exacerbate the misfortunes of the South African manufacturing, mining and agriculture sectors, which are already in deep recession. 'SA Inc.' companies should lag in this environment, while non-resource rand hedge shares should prove defensive despite their premium rating.