Global Markets

In Quarter 3, the MSCI EMEA index (which includes South Africa) fell 7.02%, which was worse than the returns of that of the MSCI Emerging Markets (EM) at -4.25% and far behind the MSCI World’s 0.53%. Year to date, the picture do not change much with the MSCI EMEA at 5.13%, relative to the MSCI EM return of 5.89% and way behind the 17.61% for the MSCI World.

The Federal Reserve and the European Central Bank both eased policies to offset signs of weaker global growth. The US economy has weakened but is not in a recession mainly due to fiscal support offsetting the adverse impact of the trade war. The inversion of the US yield curve is perceived as tolling the bell for a near-term global recession whilst Draghi also added to the call for fiscal easing.

Adding to that, commodity prices took a dive with key iron ore benchmark prices plunging some 20% in a matter of weeks and the key industrial metal, copper, hitting two-year lows. The key global manufacturing indices have also dived and are at fiveyear lows - but was at least stable over the last two months.

In the UK, Eurosceptic Boris Johnson has become the prime minister after being elected as leader of the Tories. There appears a greater likelihood of a no-deal Brexit or, at the very least, yet another postponement of the October decision deadline. The market has discounted this in large part with a weaker Sterling. As business decisions get postponed, the UK could dip into a technical recession.

Fund performance

Our feeder fund buys and sells units in a “parent fund” called the Satrix MSCI World Index fund, which tracks 23 developed countries with more than 1600 shares included in the index. We track this index through a process of optimization with an ex- ante tracking error varying around 15 basis points.

The MSCI World Index (in Rand terms) managed a return of about 8.1% (0.53% in USD terms) over the past three months. This difference in return was mainly due to the rand weakening by close to 7% against the US Dollar over this period.

For the year to date the Rand return for this index was around 23.9% (17.6% in USD terms), with rand depreciation playing a major role.

Conclusion

As the economy drifts lower as a result of lower manufacturing production, the Fed may have more urgency to intervene. Non-farm payrolls remain resilient, which points to the fact that the US is not on the brink of a recession. It remains key that core goods inflation remains stable around 3% to give room to the Fed to cut rates. It’s becoming clear that a trade war has negative consequences for US growth and core inflation.

Global Markets

Global equities rebounded in June as the US-China trade war ebbed and Trump backed off on some of his threats. Global growth data remained negative with further declines in PMIs. Although the 19 June Federal Open Market Committee meeting saw no rate change, it delivered a strong statement virtually promising a rate cut at the 31 July meeting.

During the second quarter 2019, the MSCI World Index realised a return of just more than 4%, outperforming the MSCI Emerging Markets Index, which managed a very modest return of 0.6% over the same period. Global bond yields continued to rally with US 10-year yields down to 2.01% and trading sub-2% for the first time since late 2016. US 10-year yields are down more than 125 basis points since November 2018.

In the first half of 2019, the MSCI World Index delivered a net return of 16.98%, outperforming Emerging Markets (+10.8%). Within MSCI World, North America was the best performing region with a return of 18.9%, followed by Europe’s 16.5% and the Pacific region’s 11.3%.

Fund performance

Our Feeder fund buys and sells units in a ‘parent fund’ called the Satrix MSCI World Index fund, which tracks 23 developed countries with more than 1 600 shares included in the index. We track this index through a process of optimisation with an ex-ante tracking error varying between 15 and 18 basis points.

The MSCI World Index (in Rand terms) managed a return of about 1.7% (+4% in US Dollar) over the last three months. This difference in return was mainly due to the Rand strengthening by more than 2.5% against the Dollar over this period.

For the year 2019, the Rand return for this index was around 14.7% (+17% in US Dollar), with Rand depreciation playing a major role.

Conclusion

The renewed central bank easing bias propelled global equity markets up over 6%, the best June performance on record and up close to 15% year to date in Dollar terms. And yet, the International Monetary Fund cut back the global growth outlook towards the 3% mark at the beginning of the quarter with global growth expected to be generally weaker this year. Global manufacturing continues to weaken, consistent with global growth.

Investors, at this stage, are betting on some fiscal stimulus to reverse the current softening trend in global growth rates.

Global Markets

MSCI developed markets experienced an exceptional quarter with a US Dollar return of 12.5%, outperforming emerging markets, which in turn also realised good absolute numbers of 9.9% year to date. After experiencing their worst December since 1931, global stocks posted their best January since 1987 and global equities had their second-best quarter on record. But the rally wasnft plain sailing with economic data releases surprising on the downside. Global growth is trending around the 3% mark, but the key question remains whether global growth has indeed bottomed at around trend levels.

The temporary ceasefire in the trade war and the postponement of the 25% tariff rate have provided the markets with some relief. The US Federal Reserve (Fed) joined the party with some dovish comments and markets now expect the Fed to cut rates both this year and the next, with only a modest rise in the US 10-year bond rate being anticipated. Finally, lower volatility provided a more favourable environment for risky assets.

Despite the S&P 500 Index posting its best start of the year in a decade, the inversion of the US yield curve at the end of the quarter put a damper on the initial bullish mood with concerns of a recession looming. The Fed will be using interest rates to target inflation, but Fed Chair Jerome Powell mentioned that the US was not at the neutral rate, providing optimism that future hikes will be delayed. The Fed has effectively paused the federal funds rate at 2.5%, which is below the neutral level of 3%. This provided a boost to risk assets and weakened the greenback temporarily.

However, the possibility of a no-deal Brexit is also in the balance with another extension expected beyond the crucial 2 April vote. There is an increasing possibility that Britain will go for the customs union route (a so-called esoftf Brexit), but there remains the possibility of a referendum and an early election.

The Chinese economy continues to experience a soft landing with growth expected to be in the 6.0-6.5% p.a. range in the year to come, the slowest growth rate in three decades. The Chinese are stimulating their economy further with tax cuts . the latest measure to be implemented . and at the end of March the manufacturing PMI surprised on the upside with the biggest month-on-month increase since 2012.

Fund performance

The MSCI World Index (developed markets) realised a net return of about 12.48% in US Dollar terms for the first three months of 2019, which was even better than that of the MSCI Emerging Markets index of 9.93%. For the past year MSCI Developed markets (+4%) managed to comfortably outperform MSCI Emerging Markets at -7.44%.

Our feeder fund buys and sells units in a eparent fundf called the Satrix MSCI World Index fund, which tracks 23 developed countries with more than 1 600 shares included in the index. We track this index through a process of optimisation with an ex- ante tracking error varying between 15 and 18 basis points.

The MSCI World Index (in Rand terms) managed a return of about 12.76% (12.48%in US Dollar) over the last three months - this slight difference in return was mainly due to the Rand weakening slightly against the US Dollar over this period. depreciation playing a major role.

For the year 2018 the Rand return for this index was around 6%, with Rand depreciation playing a major role.

Conclusion

Some key risks that remain for 2019 are that the tailwind of quantitative easing is turning into the headwind of quantitative tapering. Net purchases by central banks were running at $23 billion per month and could turn negative this year, especially in the case of the Fed. This is likely to add to the uncertainty and volatility during the course of the year. While inflation in the developed world remains contained with US inflation below 2.5% p.a., the pick-up in wage growth is a concern (from 1.5% to 2.5% p.a.) in the US. But it is noteworthy that there is no inflation pressure in Europe and Japan.

The International Monetary Fund (IMF) is forecasting a slowdown in the US this year with the rest of world growth stabilising. The risk remains that the Fed may still tighten rates further. However, the risk of a recession remains low in our opinion.