Quarterly Commentary

Global equity markets rewarded investors in the first quarter of 2019, propelled by constant headlines about an imminent US-China trade deal. In addition, while certain economic data points in the US have slowed, both employment and inflation readings remain robust. Solid US corporate earnings growth, the de-escalation of geopolitical tensions and the news that the Fed would keep interest rates on hold boosted global risk appetite. Not only did the Fed indicate a patient approach to further rate hikes and flexibility on its balance sheet reduction, but it also suggested further quantitative easing should the need arise.

South Africa was not left behind and the JSE All Share Index ended 8% higher than its December 2018 level. Resources underpinned the rally on the JSE and was the best performing sector during this quarter. Miners of the platinum group metals returned close to 50% for the quarter, as palladium continued its impressive run.

Another key event for the South African equity market during the quarter was the unbundling of Naspers’ pay TV and video entertainment business (MultiChoice) towards the end of February. This could be the first of many steps to reduce the discount to net asset value at which Naspers has traded and unlock value for shareholders. In our view, a key element in the MultiChoice investment case hinges on turning the loss-making African operations around. In addition, a constrained South African consumer environment limits MultiChoice’s ability to pass on price increases. Against this, the lack of cheap, easily accessible broadband for the majority of South Africans will limit the strategic threat posed by a shift to internet streaming services.

On the fiscal front, finance minister Tito Mboweni delivered a balanced but pragmatic budget, which highlighted the stark challenges ahead for South Africa. While there were no direct increases in corporate and individual tax, failure to adjust for bracket-creep effectively means individual taxpayers will be paying more taxes in real terms. The finance minister made it clear that the power utility, Eskom, will not be bailed out by National Treasury. Eskom will, however, receive R23bn a year from the national government to assist it financially while it restructures, which represents an additional burden for South Africa’s finances.
The South African Reserve Bank meeting towards the end of March delivered no rate cuts, in-line with expectations. Despite the worsening fiscal outlook and a low-growth economy plagued by rolling blackouts, Moody’s left South Africa’s credit rating unchanged. Moody’s is the only rating agency which has not downgraded South Africa’s credit to non-investment grade, allowing our bonds to remain in the Citigroup World Government Bond Index. This should be supportive of SA bonds and the rand over the short-term.

The fund’s performance was positive for the quarter and outperformed the benchmark as well as the ASISA Multi-Asset High Equity category average. Positions in Naspers, British American Tobacco and Anglo American as well as not owning Aspen, Mr Price and Shoprite contributed positively to performance.