Market overview

Global equity markets recovered strongly from the significant sell-off in the fourth quarter of 2018, gaining 12.6% in rand terms as trade tensions between the US and China eased following months of negotiations. The US Federal Reserve provided further impetus to the recovery with their more dovish tone. European equities bucked the trend, retreating 0.8% for the quarter on the back of a broad economic slowdown in the region. The European Central Bank (ECB) retaliated and pledged more support for the economy, committing to keep rates unchanged this year and pledging additional stimulus when needed. SA equities benefited from the global recovery and the JSE All Share Index returned 8.0% for the quarter. The Capped SWIX gained 3.9%. Resource shares returned an impressive 18.0% while listed property lagged equity. Local bonds rose 3.8%.

Portfolio review

The Fund returned 4.5% for the quarter, 0.4% ahead of the average peer fund. The overweight exposure to resources and high global allocation assisted performance relative to peers. Sizeable allocations in Naspers and British American Tobacco (BTI) also contributed and it was pleasing to see BTI recovering after a tough 2018. Coronation had an exceptional quarter, with many of the stock picks that took strain during 2018 recovering. Big contributors include Naspers, BTI, Anglo American, Northam Platinum and Impala Platinum.
Coronation’s relatively high allocation to SA equities further assisted performance. They maintain their position in MTN and large property exposure.

STANLIB’s Absolute team sees a future environment that is more conducive to risk-taking - largely acceptable valuations, easier monetary policy, subdued inflation in the US, stabilising PMI’s and an improving earnings outlook. Locally, they continue to manage event risks around the upcoming elections and sovereign credit ratings. Their preference is to take risk on globally-exposed assets and to be more cautious domestically.

Investec did particularly well for the quarter, driven by global equities and local bonds. Investec’s preferred asset class remains high quality global companies generating high and sustainable returns on invested capital. Locally, they believe the best opportunity remains government bonds. In their opinion, these instruments offer far higher risk-adjusted return potential than the retail, banking and property sectors.

Prudential had a satisfactory quarter in their domestic inflation plus mandate, but longer-term performance remains negatively affected by large positions in property and inflation-linked bonds. They prefer resource shares with exposure to global growth and find value in financials such as Standard Bank and Old Mutual.

The Fund’s global allocation performed well in rands, fuelled by global optimism. Please refer to our global equity and bond factsheets for more detailed information.

Portfolio positioning and outlook

SA still faces many headwinds and we are of the opinion that solid growth is not likely if severe load-shedding persists. A sustainable solution to the power crisis is critical. Our managers are cautiously optimistic around valuations for many of the SA centric companies in the Fund, while many of the global shares held provide excellent diversification benefits. There are some concerns around the negative global earnings revisions that we currently monitor, but optimism is expected to continue into the second quarter of 2019. Local bonds and income-type assets are expected to deliver promising real returns and are key ingredients in the Fund’s composition. On balance, we believe the Fund is well positioned to deliver on its long-term objectives.

Market overview
The global trade war between the United States and China continued to dominate headlines during the quarter. The US intensified tariffs on Chinese goods and China retaliated. Despite the tussle between the two economic giants, the US economy remains strong. This is visible in the rally of the US dollar and their robust labour market. These positive developments gave the Fed room to hike interest rates in September from 2.0% to 2.3%.

Unfortunately, the higher developed market (DM) interest rates and stronger US dollar do not bode well for emerging market (EM) assets such as South Africa, and most EM countries saw their currencies weaken. SA fared worse than its EM peers as signs of poor economic growth surfaced during the quarter, resulting in SA moving into a technical recession.

SA equities lost 1.6% over the quarter, driven largely by poor returns from industrials. SA property lost 1.0%, while SA bonds returned 0.8%. The weaker rand supported offshore returns, leading to a 7.4% total return from global equities.

Portfolio review

The Fund returned 1.5% for the quarter, marginally behind the average of ASISA MA Low Equity peers. Since inception three and a half years ago, the Fund has outperformed. The overweight position to resources and rand hedge shares continued to support peer relative performance. The core performance detractor has been the Fund’s allocation to inflation linked bonds at around 10%.

Coronation’s domestic absolute mandate has a rand hedge bias, with a moderately allocation to equities and property. One of their largest positions, MTN, detracted from performance.

Investec believes that investors were too optimistic about President Ramaphosa’s ability to turn the economy around in the short term and that more rational expectations have since taken root. Locally, they view SA government bonds as the best opportunity. Yielding more than 9%, these instruments offer higher risk-adjusted return potential than the retail, banking and property sectors. Their bond exposure remains prudent – lower duration, higher quality instruments, with exposure balanced against offshore holdings to limit the potential for loss. Investec maintains a high global equity allocation positioned around 30% or more.

Prudential prefers resources through counters such as Sasol and Anglo American, but also sees value in financials such as Standard Bank and Old Mutual Ltd. Long duration bonds remain a key investment for Prudential. A high allocation to inflation linked bonds and property detracted from performance over the past year. However, we remain confident that these assets are key diversifiers, providing real returns in the long-term.

STANLIB Absolute remains defensively positioned with a low local equity and property allocation of less than 30%. STANLIB sees various risks in the market and has multiple protection strategies in place to cover these risks. They maintain a relatively high allocation to duration type bonds and have been flexible on the global positioning in trying to harvest performance in difficult market conditions.

Portfolio positioning and outlook

The largest themes in the Fund are overweight resources and rand hedge shares, which has benefited performance over the past year. Global positioning remains critical for diversification.

In addition to further rate hikes in the US, we expect trade wars to continue dominating headlines and this could weigh heavily on EM sentiment. Local asset prices have retreated to levels that may provide a good entry points for investors. However, the global and SA environment remains highly uncertain and we continue to emphasize the importance of having a long-term focus when making investment decisions.