The Sanlam Select Flexible Equity Fund changed it's name to Amplify SCI Flexible Equity Fund, effective from 01 December 2019.

September was a risk-on month globally driven primarily by easing monetary policy conditions. During the course of the month the US Federal Reserve (Fed) decided to cut rates by 25 basis points. Although the Fed did cut rates there were once again divergent views with two members voting for no cut and one voting for a 50- basis point cut. In Europe, the European Central Bank (ECB) cut interest rates by 10 basis points to -0.5%. In order to mitigate the effect of negative interest rates on an already struggling banking system, a tier system for reserves with the central bank was also introduced. The ECB also announced that from November there would be a bond purchase programme of €20 billion per month although they did not provide a time horizon. On the back of monetary policy easing the MSCI World Index delivered 1.94% (in US Dollars) and the MSCI Emerging Markets (EM) Index delivered 1.55% (in Dollars). Due to lower global bond yields the search for yield continued with emerging market bonds as measured by the JP Morgan EM Bond Index delivering 0.18% (in Dollars), while developed market bonds lost 1.30% (in Dollars). Global property continues to benefit from the low global interest rates, delivering 2.46% (in Dollars).

The fear of a recession eased somewhat after the market was on edge following Donald Trump’s China tariff decisions the previous month. After inverting briefly in August, the US 2-year/10-year yield curve steepened back to positive territory; it does, however, remain very flat. The duality in the global economy continued with the manufacturing sector remaining in contractionary territory, while the services sector continues to expand. Germany is the country that continues to be particularly impacted by the trade war.

In the Middle East, geopolitical tension was momentarily elevated after a drone attack on Saudi Arabia’s oil fields. The attack resulted in an estimated 5% of global crude supply being disrupted. Oil prices spiked initially due to uncertainty surrounding the event but these fears eased as it was communicated by the head of Saudi Aramco that production would be online sooner than expected. Early indications from the attack were that Iran was involved.

Locally, the South African Reserve Bank decided to keep interest rates unchanged. They stated their medium-term outlook remains unchanged with inflation as per their Quarterly Projection Model to average 4.2% (down from 4.4%) in 2019, 5.1% for 2020 and 4.7% (up from 4.6%) for 2021. However, they continued to be concerned about trade tensions and the high financing requirements for the public sector. This is continuing to put pressure on the local currency and pushing our local bond yields higher relative to peers.

As expected, GDP for the second quarter came in positive, increasing 3.1% quarter-on-quarter annualised. This was driven by growth in the primary sector and mining, which increased 9.7% and 14.4% respectively. Business investment over the previous 12 months was flat to slightly negative. This remains a concern. The headwinds facing the South African economy were confirmed when the RMB/BER Business Confidence Index fell to a 20-year low. The South African Chamber of Commerce and Industry declined to 89.1 – the lowest since April 1985. On the back of this, South African equities had a muted month, delivering 0.19% (in Rands). The Top 40 was flat, while small caps delivered a stellar 2.21% (in Rands). Although foreigners were net sellers of local bonds over the month, they delivered 0.51% (in Rands), underperforming cash slightly, which delivered 0.57% (in Rands). Local property delivered 0.3% (in Rands) and inflation-linked bonds delivered 0.39% (in Rands).

The World Bank reduced its growth forecasts in June due to the trade conflict between the US and China, given that between them the two countries account for more than a third of global economic activity. Global growth is now forecast at just 2.6% for 2019 from 2.9% previously forecast. Global trade is slowing, and countries directly exposed to the trade war are showing a marked deceleration. While a handshake deal between the US and China took some heat out of the trade war, existing tariffs look set to stay in place. The Fed has turned sharply dovish as a result of sluggishly low inflation, threats to the growth outlook due to weaker global trade and geopolitical tensions from the trade war. The US bond market continues to price in aggressive interest rate cuts over the next 18 months and was composed by the Fed's decision not to cut in June. Locally, South Africa's GDP posted its biggest quarterly contraction since 2009 in the first quarter of this year, printing a -3.2% quarter-on-quarter versus 1.4% growth in the previous quarter. The rand relative to the dollar appreciated some 3.24% in June as risk sentiment improved amid expectations of looser monetary policy in the US and the Eurozone.

The local equity market followed global markets higher, and the MSCI World index delivered some 3.25%. Furthermore, the MSCI EM index marginally underperformed its developed market counterpart, delivering some 2.94%. Underscoring yields moving lower in the month is a sense of cautiousness following the dovish pivot by a number of central banks in recent times. As such, the JP Morgan Global Aggregate index lagged risk assets and delivered -1.16% as the currency strengthened. Given the risk-on month, emerging market bonds fared better than their developed market counterparts, delivering some 0.80%. The local equity market followed global markets higher, and the ALSI delivered 4.78%. The strong rally in the local market was largely driven by the Resi-20 index delivering some 10.28%. The ALBI lagged its risky counterparts and delivered 2.27%, with the 7-12 year area of the yield curve rallying some 2.70%. Furthermore, inflation-linked bonds underperformed their fixed coupon counterparts, delivering 0.13%. Given the risk-on environment the local property market delivered some 2.20%. Local cash delivered 0.59% for the month of June

The levels reached by global equities in their wider rally for 2019 remains dependent on signs of a resolution in the trade war. However, concern about the darkening outlook for global growth has drawn investors back into government bond markets in March. A weaker outlook for the global economic growth in the first quarter of 2019 was reflected in the decline in sovereign bond yields as a dovish Fed and ECB led to a repricing of interest rate outlooks. Furthermore, risks to growth remain and the US yield curve (measured by the difference between the 10- year and 3-month Treasury yields) inverted, thereby flashing a recession signal for the first time since 2007. The Fed signalled no rate rises this year, bringing its projections more in line with market expectations. The ECB’s actions were more dovish than expected, with a fresh round of cheap lending for Eurozone banks due to start in September. The highly uncertain outcome of Brexit and a slowdown in global growth will continue to create a challenging mix for the ECB. South Africa made it through another scheduled Moody’s review to retain its local currency investment-grade rating with a stable outlook. Moody’s delayed South Africa’s ratings review with SA national elections on 8 May 2019.

With signs of a deepening global economic slowdown and negative headlines, emerging market currencies came under pressure in March. As such, the rand depreciated some 2.50% relative to the dollar. Markets largely shrugged off concerns around trade disputes and geopolitical uncertainty. The MSCI World index delivered some 3.92% in rands. Emerging markets underperformed their developed counterparts. The MSCI Emerging Markets index delivered some 3.42% in rands. The flight from risk kept investors piling into government bonds, pushing yields lower. The JP Morgan Global Aggregate returned some 4.16% in rands. Emerging market bonds lagged their developed market counterparts, delivering some 3.70% in rands. The outlook for developed market REITs and commercial real estate remains favourable, despite some mixed macroeconomic news this year and potential headwinds for distribution growth. As such, developed market property delivered some 6.32% in rands.

The local equity market followed global equity markets higher and rallied some 1.56% in rands. The positive outcome was driven by Resources and Industrials both rallying some 4.61% and 3.49% respectively. Financials struggled in March, declining some 4.78%. Local longer dated bond yields were largely unchanged over the month. The SA 10-year government bond yield rallied some 13 basis points in the month. As such, the All Bond index delivered some 1.33% in rands. Inflationlinked bonds underperformed their fixed coupon counterparts, delivering some -0.85% in rands. The listed property sector continues to struggle having given the weakest dividend forecasts in more than a decade as they struggle to grow rentals and fill vacancies amid weak business and consumer confidence. As such, the SAPY declined some 1.46% in rands.

The FTSE/JSE All Share Index sold off a further 4.5% in September while encountering another heavy weight falling more than 30% in the month. Aspen’s share price fell aggressively post its earnings miss, while Naspers continued to track backwards due to a delay in the monetisation of Tencent’s recent game launches. South Africa finds itself in the midst of an unprecedented emerging market sell-off combined with a nervous market which aggressively sells off stocks that underperform or encounter any ESG concerns. Commodity prices remained strong, with our view of this being maintained into the Chinese winter shutdowns.

Performance Summary
Capricorn’s higher weighting in commodities performed well in September. Unfortunately our exposure to Aspen detracted from performance as it sold off aggressively in the month. Small caps continued to sell off and remain out of favour as the prospects for SA Inc. remain uncertain with growth appearing lacklustre.

Overall we are holding high cash balances to deploy into opportunities. We believe SA industrials are at cheap levels while quality companies like Bidvest continue to grow in a tough market. Self-help stories and resilience to grow in tough markets are qualities we looking for in companies, and we believe these attributes will result in premium ratings through this cycle.

The largest equity contributors to performance in September were:
Mining stocks - Mining stocks performed well in September as China heads into its winter shutdown. Glencore and Anglo American were key gainers as China introduced a $200bn stimulus package. We believe commodity fundamentals remain strong with supply/demand balances moving into a deficit ahead, which is constructive for pricing. The companies are generating significant free cash at spot prices; we continue to see dividends and cash buybacks further improving.

Echo Polska (EPP) - EPP posted 12% half-year distribution growth at its recent first half earnings. The macro environment for Polish property players continues to favour expansion in a robustly growing economy ahead of its European peers.

Capitec (CPI) - Capitec performed well as it stood out in tough times. The bank continued with robust transactional volume growth and customer gains. The rollout of its credit card has performed well, although the bank remains cautious on its lending criteria while economic growth remains subdued.

Capitec is launching new lower-risk products in funeral cover with pricing significantly lower than its peers, and looks to capture market share as a result. The largest equity detractors from performance in

September were: Aspen - Aspen disappointingly missed its earnings forecasts and also sold its infant milk business below expectations of $1bn. Aspen aggressively sold off after earnings, we reduced our positons shortly after although it still detracted from our performance.

Naspers (NPN) - Naspers continued to trade backwards in line with Tencent, which has fallen from a peak of HKD475 to trade at HKD300 currently. This is partly due to the trade war, emerging market (EM) outflows and Tencent’s inability to monetise its recent game launches. We believe Naspers continues to focus on unwinding its discount to Tencent, which will likely realise shareholder value ahead.

SA Small caps - The effects of EM outflows have negatively affected small caps significantly. A miss in earnings was harshly dealt with by the market with Blue Label Telecoms (low quality result), Libstar (earnings miss) and Balwin Properties trading backwards in Q3. We have reduced our positions in Libstar and Blue Label Telecoms to appropriate sizing in our portfolio.

Political Update

The appointment of Tito Mboweni was timely due to mounting pressure on Nhlanhla Nene, and Cyril Rampahosa’s need to maintain his perseverance for good governance. The appointment of a credible candidate in Mr Mboweni was essential given his decade long tenure as the SA Reserve Bank Governor, seeing South Africa through the global financial crisis. South Africa has a busy fourth quarter ahead, which includes a Moody’s rating review, the Mid-term budget and the "Expropriation Without Compensation" (EWC) bill being submitted to Government.

We believe Cyril Ramaphosa’s economic stimulus plans will start producing some green shoots, which will be positive for local listed companies and potentially the Rand. We believe a convincing win with above 60% majority and no coalition government may create a second round Ramaphoria effect for our local stock market.