Global economic activity continued to lose momentum over the last quarter, with major risks weighing on the outlook. These include escalating trade tensions, disruptions in Global Supply chains, ongoing BREXIT uncertainty and rising Middle East tensions, all of which are dampening confidence and further restraining investment spending. Recent forecast updates by the OECD showed further downward revisions , with growth of 2.9% projected for 2019, down from 3.25% projected as recently as May. This follows growth of 3.6% in 2018, and will be the weakest growth recorded since the Global Financial Crisis. The OECD expects growth of 3.0% in 2020, down from its May projection of 3.4%. The downward revisions were broad-based, but countries with greater exposure to global trade saw the biggest negative revisions. These included most Emerging Economies and some advanced economies like Germany.

The South African economy rebounded over the second quarter, growing by an annualised 3.1%, following a contraction of 3.1% over the preceding quarter . The recovery was driven by a dissipation of major headwinds like load shedding and supply disruptions in sectors like mining evident in the first quarter. The rebound was mainly evident in tertiary sectors. Demand-side sectors also showed broad-based improvements, including a rebound in fixed investment which fuelled an increase in imports and a consequent widening of South Africa’s current account deficit. The current account deficit widened to 4.0% of GDP, from 2.9% in the first quarter and 3.5% in 2018 .

South Africa’s consumer inflation picture has remained benign over the past quarter, with both headline and core consumer inflation below the midpoint of the Reserve Bank’s target range. CPI inflation rose to 4.3% in August, from 4.0% in July; core CPI inflation rose to 4.3%, from 4.2% .We expect consumer inflation to end the year at around the midpoint of the target range, with an annual average of 4.3% for the year. The biggest upside risk at the moment is higher oil prices. The SARB forecasts growth of 0.6% in 2019, 1.5% in 2020 and 1.8% in 2021 . The Bank forecasts CPI inflation of 4.2% in 2019, 5.1% in 2020 and 4.75 in 2021. With inflation and growth expected to remain low, the MPC will remain under pressure to ease the repo rate further.

Some of the strong gains that the South African equity market experienced in the first half of the year was eroded by a tough third quarter. This quarter realised a decline of 4.5% in the All Share Index and resulted from the general retailers, resources as well as the financial sector all posting declines of close to 7% . The potential threat of a slowdown in the Chinese economy due to trade wars have outweighed the benefits that a stronger commodity basket should have had on returns. On a monthly basis, September has shown some signs of stabilisation as the market returned 0.2% with an improvement in all of the individual sectors . The local bourse, which continues to be attractively valued, should provide potential upside in comparison to international markets. However, we continue to emphasise diversification and robust stock selection in our portfolio construction and tactical allocations.

The deteriorating global economic conditions encouraged investors to bet on monetary stimulus by the major central banks. Over the quarter, the US Federal Open Market Committee (FOMC) cut its benchmark twice amid the worsening outlook. In September 2019, acknowledging weakening momentum and increased trade war risks, the US Federal Reserve (Fed) cut rates by another 25bps to a range of 1.75-2.00% . Elsewhere, the European Central Bank (ECB) materially exceeded market expectations on stimulus, launching open-ended asset purchases, cutting rates and improving lending terms to banks. Emerging economies such as China, India and Middle Eastern countries also followed suit and engaged in a rate cutting cycle.

In South Africa, the Reserve Bank left the Repo rate at 6.50% at its September meeting, following a cut of 25 basis points at its July meeting. With global yields in developed markets declining or in negative territory, the South African Generic 10 Year Bond remains attractive on both a nominal and real yield basis. It ended the quarter at 8.89%, peaking at 9.03% and with a low of 8.48%. Local yields remained steady over the third quarter with the weakening currency. The country’s risk premium increased following the uncertainties around Eskom turnaround plan and the increased risk of fiscal shortfall thereof. In addition, with Moody’s review expected at the end of October 2019, overseas ownership of SA government bond declined to 37% at the end of August 2019, from a high of 43% in March 2018. Foreigners were net sellers of ZAR 30.4bn of South African bonds in the third quarter while in the second quarter, although yields were at similar levels, the net selling was ZAR 14bn of government bonds. However, with inflation below target range at 4.5%, real return on South African bonds remains attractive at close to 4.7%.

Amidst the volatility, our income exposure has been very well positioned to provide downside protection relative to peers. In this environment, short term increases in benchmark yields do provide us with important buying opportunities in order to maximize the risk-adjusted return of the funds over the long term.

Our balanced portfolios are well diversified across geographies, currencies, asset classes, sectors and instruments. This appropriate level of diversification allows for a relatively lower level of risk and the fund is positioned to generate real returns for our clients over the long term.