Our investment philosophy is based on taking long-term views and relying on fundamental analysis to make informed investment decisions. After a difficult period for the JSE, the market is trading on a forward P/E of 13x and an attractive forward dividend yield of close to 4%. The resources position we accumulated over the past few years when the sector was decimated delivered strong outperformance over the past year. It is by going against the grain that we will continuously be able to deliver superior investment performance.

Bonds
Minister of Finance Tito Mboweni delivered the national budget in February, which forecast deficits of over 4% over the medium term. In the budget, government also allocated R69 billion to Eskom, but failed to do so in a deficit-neutral way. The financing requirement is projected to increase to R335 billion in the 2019/20 fiscal year from R239 billion previously. R216 billion will be financed via local bonds, R65 billion will come from cash resources and the balance from T-bills and offshore bonds.

Yields on South African bonds underperformed the rally in developed markets partly because of the increased risk of a credit downgrade from Moody's, which would have resulted in South Africa losing its investment grade status and falling out of the World Government Bond Index (WGBI). Moody's was scheduled to announce its latest credit opinion on South Africa on 29 March.

Foreign investors bought R11.3 billion of South African bonds in January as emerging market funds attracted significant inflows. However, flows turned slightly negative in February as worries about a global economic slowdown increased and SA-specific issues dominated. With inflation printing at 4% and 4.1% in January and February respectively, demand for inflation protection has been low and ILBs have continued to underperform nominal bonds. The FTSE/JSE Government Bond Index (GOVI) returned just 0.5% for the quarter compared to the FTSE/JSE All Bond Index (ALBI) return of 3.8%. Yields on the 15-year ILB (R202) traded at 3.32%, their highest level since June 2009, and the long-dated I2025 touched a new high of 3.42%. ILBs are our least favoured fixed-income asset class.


Yields on the benchmark US 10-yr bond fell to 2.40% from 2.62% after the March FOMC meeting wherein the Fed 'dot plots' indicated that the Fed was unlikely to raise rates this year and the median 'dots' indicated only one rate increase in 2020.

International
The 'Fed Put' is the widespread belief that the Fed can always rescue the economy (and markets) by lowering interest rates. Markets were very volatile at the end of 2018 and it seems like the Fed Put is alive and well. The most significant statement for financial markets over the quarter was certainly this extract from the Fed's press release on 30 January 2019: 'In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.' Almost all economists and market pundits were pricing in two to four Fed hikes in 2019. This abrupt change from hawkishness to dovishness caught many by surprise. Risk assets subsequently rallied with emerging markets too performing well over the quarter.


In Germany and China indicators of growth such as the Manufacturing Purchasing Managers' Index (PMI) have printed lower than expectations, resulting in monetary stimulus in China and expectations of continued accommodation in Europe. German and Japanese 10-year bond yields rallied to -0.07% and -0.09% respectively. The global stock of bonds trading with negative yields increased from $8.325 trillion in January to $10.353 trillion at the end of the quarter.


The US and China continue to be the shining lights in the space of solid global growth, but as we stated in our December quarterly report, the US is running at full capacity with growth above potential and unemployment at multi-decade lows; and China carries on with the delicate balance of transitioning its economy from one that is investment-led to one that is consumer-driven. Positively, however, the pause in the US?China trade tariff war continued, with both parties emphasising that progress is being made. The significance of this should not be underestimated, as an often forgotten fact is that the Smoot?Hawley Tariff Act of 1930, which raised US duties on hundreds of imported goods to record levels, is America's most infamous trade law, and it is often associated with ? and sometimes blamed for ? the onset of the Great Depression, the collapse of world trade, and the global spread of protectionism in the 1930s. Outside of the US and China, the major theme has clearly been the relentless Brexit deadlock between the Conservative and Labour parties, with the most recent development being MPs voting down all eight Brexit options on 27
March 2019. The ECB has had to restart its stimulus provision after a two -month recess, as inflation declined, economic growth in the Eurozone deteriorated and manufacturing activity weakened.


For the three months to March in Dollar terms, the MSCI World Index made a strong comeback from the December quarter to deliver a phenomenal return of 12.5% and the MSCI Emerging Markets Index provided a solid return of 9.9%. Global bonds, as measured by the Bloomberg Barclays Global Aggregate Bond Index, were up 2.2% over the quarter. For the year to date, the local currency remained largely flat (down 0.3%) versus the US Dollar. In relation to the international exposure in the fund, from a relative valuation perspective we continue to favour equities over property and fixed-income assets. With developed market equities having rerated strongly since their December lows, we have moved to add some downside protection via derivative overlays on a portion of our equity holdings. Our property basket trades at a dividend yield of 7.5%, superior to that of sovereign bonds.