Fund review

The STANLIB Global Balanced Feeder Fund returned +2.6% over the quarter compared with +0.8% from the composite benchmark. In aggregate, asset-allocation effects were negative, detracting 17 bps from the relative return. The overweighting of cash accounted for most of this, though the underweight position in bonds and overweight in property also detracted. This was more than offset by positive selection effects, which made a relative contribution of 211 bps, largely driven by equities. The equity allocation comfortably outperformed its benchmark, as did the fixed income allocation, albeit to a lesser degree.
Market overview

Global equities (measured by the MSCI ACWI index) returned 3.8% in dollar terms for the quarter, while bonds (Barclays Global Aggregate) returned 3.3%. Both asset classes were supported by dovish signals from key central banks. Equities and corporate bonds also benefited from hopes for an end to the US-China trade war. These hopes took a knock in May when President Trump pressed ahead with tariff increases against China and proposed new duties on the remainder of imports from the country. China responded in kind, while investors responded by selling risk assets. Later, Trump further ramped up trade tensions by threatening Mexico with steep tariffs unless it dealt with “the illegal immigration problem”. Risk assets bounced back strongly in June. Mexico struck an immigration deal with the US, avoiding tariffs in the process, and Trump confirmed he would meet with his Chinese counterpart at month end. While receding trade-war fears were a factor, the June rebound was mainly propelled by central bank commentary. The Federal Reserve and ECB both hinted they were prepared to cut rates if necessary. The ECB even suggested that more quantitative easing could be on the cards. Of the main equity regions, Europe ex UK was the strongest performer in dollar terms, followed by the US. The UK trailed global averages as hard-Brexit fears weighed on the pound. Emerging markets and Asia ex Japan lagged further behind. Both were held back in April by a stronger dollar (which later weakened) and were then hit hard in May’s risk-off rout. The MSCI Japan also underperformed; a stronger yen dampened sentiment towards its many exporters, but also bolstered returns for dollar-based investors in the index.

Looking ahead

The cycle is clearly mature but we do not believe the end is imminent – rather it is being extended and redefined by a combination of structural factors leading to low interest rates, low inflation and ongoing moderate growth. The warning signs we monitor that would suggest a sharp turnaround are not all flashing red. Our central case is that US growth should moderate over 2019 as the impact of fiscal stimulus rolls off. Inflation should remain under control and valuations continue to be fair, leaving a generally benign environment for investors. In recent months, we have become somewhat less constructive on the outlook for equities, given ongoing trade tensions, increasingly patchy economic data, falling earnings expectations, and our forecast of fewer rate cuts in the US and Europe than are currently priced in. Within fixed income, we are becoming more positive on corporate bonds: slow but positive global economic growth, gentle inflation and dovish central-bank policy tends to be a sweet spot for credit investing. Leverage among US companies, compared to European peers, is a concern but we believe there are opportunities within specific industries and regions. The energy, telecoms, and food & beverage industries have previously raised leverage, but a number of companies in these areas are now reducing debt.

The commentary gives the views of the portfolio manager at the time of writing. Any forecasts or commentary included in this document are not guaranteed to occur.

Fund review

The portfolio returned 11.5% over the quarter compared with 9.4% from the composite benchmark. In aggregate, asset-allocation effects accounted for 23 bps of the relative return. The overweighting of equities and underweighting of bonds helped performance. Being overweight in cash detracted. Selection drove performance, adding 204 bps. Modest negative effects in the cash and property portfolios were more than offset by positive effects in the equity and fixed-income allocations, as both comfortably outperformed their benchmarks.

Market overview

Global equities (as measured by the MSCI AC World Index) bounced back strongly, returning 12.3% for the quarter in dollar terms. Global Bonds returned 2.2%, benefiting from both falling core yields and tightening credit spreads. Amid more signs of slowing global growth, investors welcomed increasingly dovish signals from key central banks. Apparent progress in US-China trade talks provided further support, as did Chinese stimulus measures - both actual and anticipated. At its March policy meeting, the Federal Reserve indicated that US rates were unlikely to rise in 2019, and that it would stop reducing its balance sheet in September. Treasury yields fell sharply in response and the US yield curve briefly inverted - a move seen by many as a harbinger of recession. The ECB pushed out its next projected rate hike to 2020, cut its Eurozone growth forecast for 2019, and pledged another round of stimulus via cheap loans for banks. Brexit dominated the headlines in Europe. The UK parliament rejected the EU withdrawal agreement three times. While MPs also ruled out a no-deal exit they then voted down every other Brexit plan put in front of them. With time running out, the EU granted a short extension to Article 50. Despite the mounting turmoil, sterling strengthened over the quarter as no-deal fears receded somewhat. The major equity regions all delivered strong gains. In dollar terms, the US outperformed the MSCI AC World, while the UK was broadly in line with the global index. Asia ex Japan lagged modestly, with Europe ex UK and emerging markets further behind. Japan was the main laggard, with sentiment towards its export heavy market dampened by disappointing global economic indicators.

Looking ahead

The cycle is clearly mature but we don’t believe the end is imminent - rather it is being extended and redefined by a combination of structural factors leading to low interest rates, low inflation and ongoing moderate growth. The warning signs we monitor that would suggest a sharp turnaround are not all flashing red. Our central case is that US growth should moderate over 2019 as the impact of fiscal stimulus rolls off. Inflation should remain under control and valuations continue to be fair, leaving a generally benign environment for investors. We expect global equity markets to make gentle positive progress, corporate profits to continue growing, companies to behave in an equity-friendly way and valuations to remain supportive. While 2018 was not a great year for bonds, 2019 looks set to produce more attractive outcomes for those who can navigate divergent monetary policy and credit cycles. The degree of leverage among US companies, compared to European peers, is a concern but we believe there are opportunities within specific industries and regions. The energy, telecoms, and food & beverage industries have previously increased leverage, but now a number of companies in these areas are reducing debt levels.

The commentary gives the views of the portfolio manager at the time of writing. Any forecasts or commentary included in this document are not guaranteed to occur.

Fund review

The fund returned 5.1% over the quarter, underperforming its benchmark, which returned 5.4%. The underlying dollar fund returned 2.4% over the quarter, marginally lagging the composite benchmark by 5 bps. In aggregate, asset-allocation effects were positive overall. Being overweight in equities and underweight in bonds aided performance. This was more than offset by selection effects, which were negative in aggregate: a positive effect in fixed income was outweighed by negative effects in the property and cash allocations.

Market overview

Global equities delivered strong gains in aggregate, outperforming global bonds as optimism about the booming US economy and robust corporate results overcame fears about global trade and country-specific risk in emerging markets. Core bond yields rose and credit spreads narrowed as safe-haven demand ebbed and US monetary policy tightened. On the trade front, the US and EU pledged to “work toward zero tariffs on nonauto industrial goods”. The US also reached a preliminary trade deal with Mexico, to which Canada eventually subscribed. There was no such breakthrough in USChina relations, with each continuing to hit the other with new tariffs. Perhaps the quarter’s most eye-catching piece of data was US second-quarter GDP growth of 4.2% (annualized). This was due in part to President Trump’s tax cuts, but also to frontloading by exporters before import tariffs came into force. The Turkish lira fell to record lows in August, sparking fears of contagion into other emerging markets, but stabilized in September following a sharp rate hike by the Turkish Central Bank. Italy was another source of volatility, as investors worried that the new coalition government’s maiden budget would breach EU deficit rules. Among the major equity regions, the US fared best. Japan was next strongest, buoyed by a weaker yen. UK equities fell on Brexit-related uncertainty. The MSCI Emerging Markets index also fell in dollar terms, weighed down by weakness in China, which bore the brunt of the trade-war fears.

Looking ahead

The broad global macroeconomic environment can be characterised as ‘Goldilocks like’, with decent growth and only gentle rises in inflation in most regions. The global economic setting is not sufficiently hot to warrant aggressive monetary tightening, nor so cold as to create fears of economic recession. For now, we anticipate that these conditions will persist. Our reflationary economic outlook, together with good earnings forecasts, bodes well for risk assets. We have upgraded our view on the US equity market to “neutral”. Despite the formation of an anti-establishment government in Italy, we think the risk of a eurozone break-up is low: both the coalition parties have toned down their euro-scepticism of late and most Italians still support the currency union. Bond markets remain supported by accommodative monetary policy, including – for the rest of this year at least, outright quantitative easing in the eurozone, and demand for income should remain a positive force. The credit cycle is, however, fairly mature and, although earnings have been strong, the benefits have been largely accruing to shareholders. With bond yields still low, returns are expected to be muted. The commentary gives the views of the portfolio manager at the time of writing. Any forecasts or commentary included in this document are not guaranteed to occur.