The STANLIB Balanced Cautious Fund produced a return of +3.5% over the past quarter ended 30 September 2017, while its benchmark’s return was +4.1%.

Global GDP growth has improved to its most synchronised point since before the Global Financial Crisis with very few countries currently in negative GDP territory. While not being growth above longterm trends yet, leading indicators across the globe are mostly pointing to sustainable growth into 2018 at least. Stronger growth usually means heightened concerns of central bank authorities increasing their inflation outlooks, which often leads to rising interest rates and a headwind for risk assets. However, at this stage of the current cycle there is still enough global spare capacity, meaning inflationary pressures are subdued, thereby allowing central banks to remain accommodative by keeping interest rates at record low levels.

This widespread improvement in the global growth outlook, together with the continued support from central banks, meant a renewed surge in risk assets during the quarter with global equities (+8.8%) and local equities (+7.0%) leading the way, followed by local property (+5.7%), global bonds (+5.5%) and local bonds (+3.7%). From a local equity market perspective, resources (+17.7%) were the leading beneficiary of surging oil and copper prices, rising on the improved growth outlook, while industrials (+8.3%) and financials (+6.1%) also saw strong gains in the quarter.

The global asset class returns, as well as locally listed companies with multi-national exposure, were assisted by a weakening rand in the quarter (+3.7%) as the political risk in South Africa rose on the heightened lobbying and uncertainty leading into the December ANC elective conference. This increased risk has also lowered consumer and business confidence levels, which has fed into the very low GDP growth levels currently being experienced in the country.

Looking ahead
We have been increasing your Fund’s exposure to both local and offshore equities as we have become more confident about the growth outlook. However, given that equity valuations remain elevated relative to long-term average levels, we have also taken out some protection so that if markets do correct, we reduce the risk of capital loss over short periods. Given the on-going uncertainty in South Africa, we remain tilted towards higher quality, multi-national companies that have a long-term history of compounding returns over time.

The STANLIB Balanced Fund increased by 0.9% over the past quarter ended 30 June 2017, underperforming its benchmark by 0.3%.

The excess liquidity measures in some emerging markets, which helped to strengthen commodity prices and emerging market currencies, started to roll over in the period. Developed markets like the US, Europe and the UK became more vocal about their desire and intent to normalize monetary policy by hiking interest rates, effectively stepping away from the highly accommodative policies followed post the global financial crisis back in 2008. Higher inflation rates coupled with sustainable economic recoveries, which remains key ingredients to justify such policy changes, still remain uncertain. Reduction in the size of balance sheets, both in the US and Europe, have also come on the agenda. The increased probability of macro-economic policy errors coupled with heightened global political uncertainty have increased overall equity market risk in general, although specific individual equity market opportunities started to present itself.

Domestic cash (+1.4%) and bonds (+1.6%) outperformed domestic equity (-0.8%). International equity performed well (+5%) and continued its positive trajectory despite the 2.3% appreciation of the rand against the US dollar. In dollar terms, the MSCI Emerging markets delivered 6.4%, materially outperforming MSCI South Africa (3.6%) as well as the MSCI World Index (4.2%). From a local sector perspective, the Resources index underperformed by declining 6% as commodity prices sold off post a strong rally. Financials also underperformed, with a marginal 0.3% increase as consumer pressure intensified whilst enjoying some buffer from downward trending inflation expectations. Industrials was the clear outperformer, advancing 3.4% which continued its year-to-date outperformance. Value underperformed growth style shares during the period, with Media and Technology still the key driver.

Equity valuation levels in general remain elevated, with a preference for income products which should still be able to deliver inflation beating returns without the risk of substantial capital losses in the former. Our preference remains skewed to offshore equities, where we find more value and conviction relative to the domestic equity market.

Looking ahead

We have positioned your Fund conservatively, given the extent of equity market gains over the past seven years, together with the level of valuations and continued uncertainty around the global growth path; we remain cautiously tilted to higher quality multi-national companies that have a longterm history of compounding returns over time and are focussing on selective domestic equity opportunities.

The STANLIB Balanced Cautious Fund increased by 0.2% over the past quarter ended 31 December 2016, outperforming its benchmark by 0.4%. The 5-year rolling performance remains respectable, outperforming the benchmark by 0.6% on an annualized basis.

During the last quarter, we had another major political surprise with Donald Trump being elected as the new US president, shortly after the "non-consensus" BREXIT vote in the second quarter of 2016. The market originally perceived this as a high risk event but changed its mind as the expectation of better growth and inflation, based on expected new Trump administration policies, started to filter through. The US bond yield moved higher with a subsequent strengthening of the US dollar as the market positioned itself for reflationary expectations. Domestically, the timing and possibility of a credit rating downgrade was pushed further out as confidence increased that, Finance Minister, Pravin Gordhan will be able to contain SA’s debt levels.

An overweight position in domestic cash, which was the best performing asset class returning +1.8%, helped contribute to the funds outperformance as well as domestic equities and global bonds. The appreciation of the rand detracted from performance, having a negative impact on both domestic rand hedge companies and foreign equities, with the latter returning -3.0% in the quarter. Rising global yields also forced global bond and property returns lower.

In Dollar terms, the MSCI SA Equity Index increased +5.4%, outperforming both the MSCI Emerging Markets Index (+0.3%) and the MSCI Developed Index (+2.4%). From a local perspective, our Resources sector declined -1.2% while the Industrial Index traded -4.7% lower. The Financial Index, which gained +2.9% and helped by a stronger domestic currency, outperformed the other two subsectors.

Equity valuation levels remain elevated, with a preference for income products which should still be able to deliver inflation beating returns without the risk of substantial capital losses in the former. Our preference remains skewed to offshore equities, where we find far more value and conviction relative to an expensive domestic equity market.

Looking ahead

We have positioned your Fund conservatively, given the extent of equity market gains over the past six years, together with the level of valuations and continued uncertainty around the global growth path; we remain cautiously tilted to higher quality multi-national companies that have a long-term history of compounding returns over time.