Namibian commentary

Investment returns continues on its lukewarm path with very little be excited about. Namibian investors having not only to content with a volatile market but also only local bonds and foreign equities, helped by the US market, having broadly outperformed inflation over the last 3 years. Positioning a portfolio in times like this is difficult when the local and world growth outlook looks under pressure, increasing interest rate environment and high volatility in market prices. Investors should be weary of trying to follow the returns, jumping from one investment/strategy to the next trying to find the short term returns and taking on more risk than they should.

We’ve not been spared by the global themes playing out as we see the continued US-China trade wars, interest rate normalization in the US, higher oil price and emerging market contagion originating mainly from Turkey and Argentina which had an effect on our currency, money and bond markets. Regionally South Africa has continued to disappoint on their growth numbers and with a second consecutive quarter growth below zero signaling a technical recession.

Namibia’s GDP numbers continue to disappoint and very little to be positive about after 2016, the second quarter of 2018 coming in at -0.2% recording the 9th quarter of negative growth in a row. The 2018 stats shows the sectors with biggest drop was Education and health with comments from NSA that the reason being is a decline in number of employees, one of the detrimental effects of government’s efforts in prioritising expenditure. With pressure on SACU revenue, moderating Chinese growth and very little wiggle room left in the Namibian budget it seems in the short run risks being skewed to the downside.

Inflation numbers continue on the upward walk from January low of 3.5% to 4.8% recorded in September, close to our initial projection from the beginning of the year. Although due to the drop in Namibian Dollar and rise in oil prices has resulted in a bit of a deterioration to the inflation outlook for the medium term.

Following South Africa the MPC of Bank of Namibia has not changed the repo rate which is still held at 6.75% and although the committee notes a deterioration of growth not only in Namibia but other key monitored economies, a positive growth outlook for the rest of the year and sufficient holdings of foreign reserves being the reason to keep rates where it is.

The medium-term budget policy statement to be delivered in October will be scrutinised for any support to a struggling economy, especially after a few recent sweeping changes to the tax regime which has seen Namibian Fiscus targeting dividend and trust income. Namibia has run successive budget deficits since the global financial crisis in 2009 to stimulate the economy, which has seen public debt swell to over 40% of GDP from less than 20% of GDP before 2011, leaving little room to continue rely on only borrowing to support the economy.

Market review

Most asset classes has had an unimpressive quarter as we saw the JSE ALSI pull back around -2.1% for the quarter and down -3.4% so far in 2018. The Resources and Financial sub-indices has at least bucked the negative trend seen in the broader market and has help the NSX Overall, which has a higher exposure to these type of companies, deliver a positive quarter 2.97% and up 3.81% for 2018. Post the Steinhoff debacle, market participants are increasingly jittery and it seems the level of over-reaction to negative news has become extreme and bringing quite a bit of volatility to the local market.

Although nothing much has happened on the local NSX index the last quarter, most of the listed companies’ which has June year ends results have been published. The banks, FirstRand Namibia and Capricorn Investment group, has shown a slight uptick in non-performing loans, FNB up to 1.7% from 1.4% in 2017 and CGP up to 3.3% from 2.2% in 2017. Something to keep an eye on as borrowers come under pressure but both banks delivering a respectable set of results in the current environment. Namibian Breweries profit flat from 2017 but some good developments in the South African Sedibeng brewery run with Heineken. Bidvest Namibia unfortunately not yet out of the shadow from their disappointing fishing division results and still trying to get out of the sector. One on the new tickers, Letshego Namibia, delivering a solid set of results after listing in 2017, but with the update in Microlending Bill some uncertainty around continuing ability to grow its loan book as aggressively.

Local bonds continue to be the one dependable asset class and looking at the IJG ALBI index delivered a return of 2.17% for the quarter and up 5.73% for 2018 and outperforming local cash, taking the IJG Money Market index as proxy, up 1.89% for the quarter and 5.83% for 2018.

Interest rates moved upward during the last quarter when the Namibian 10 year government yield took a short turn above 11% when it move from 10.83% at the end of June to high of 11.16% on 11 September back down to 10.89% at the end of the third quarter. Although still quite high compared to historic averages the interest rate spread over that of SA Bonds has started coming down after the sharp spike recorded in March 2017, spreads now hovering around the 1.65%, levels last seen early 2017 which is a positive move. On the shorter term the local 91 day TB issued by the Bank of Namibia spread has also narrowed over the SA counterpart where the quarter end yield was 7.59% compared to 7.12 in SA (7.92% and 7.07% respectively in June).

Asset allocation

Local nominal bonds with prospective real yields above 5% are attractively priced and we continue to add bonds to our funds. At current yields it makes valuation sense to do so and increased the bond exposure with 2% during the quarter. Local equities have been increased on an effective level. Using a bottom-up, fundamentally-driven valuation analysis of the equity market, we believe this asset class to be currently trading at attractive valuation levels and offering reasonably good value and increased the equity exposure of the fund with 3% during the quarterand increased the equity exposure of the fund with 3% during the quarter.

The first quarter of 2018 has kept everyone on their toes with quite a bit happening on the political front, release of economic data and volatile markets. This quarter usually sets the general mood for the year ahead, because on the economic side we’ve got the budget being delivered, the largest movement in inflation normally happens in January and the prior year’s GDP numbers are released.

Namibia has not escaped the volatility from the global financial markets and we’ve seen the sentiment in the markets. Economic commentators generally went from pessimism to general optimism especially concerning the regional political arena and solid economic recovery being projected. Although a positive turn for our markets, the pendulum of sentiment does tend to swing more to the extreme ends and we have yet to see the numbers to support this solid recovery talked about.

In South Africa it was once again quite a busy quarter on the political front, filled with a number of positive developments. On 13 February 2018, the National Executive Committee (NEC) of the ANC recalled Jacob Zuma as president of South Africa. At the eleventh hour the next day he resigned with immediate effect and on 15 February Cyril Ramaphosa became the fifth democratic president of the Republic of South Africa. Both the rand as well as local bonds subsequently strengthened even further. The newly elected president finally delivered the delayed State of the Nation (SONA) address on 16 February in which he demonstrated an intent and willingness to address the country’s challenges and issues. Although the speech did not include specific details, it provided enough indications that there is intent to implement a framework of good governance, clearer policy direction, growing the economy and, importantly, rooting out corruption. The budget also included the first increase in VAT in 25 years (from 14% to 15%), as well as strict expenditure ceilings. By the end of the month a number of Cabinet changes were also announced, with changes to 24 of the 38 ministers, while also restoring Nhlanhla Nene as minister of finance.

Namibia’s economy
One of the big items to look forward to in the first quarter is the budget speech. The budget delivered by the Finance Minister, Calle Schlettwein was a consolidating one in terms of spending. The current environment under which the budget was prepared is still one of below long term growth, expected revenue collection and historically high debt levels. The budget was presented around three pillars, namely reduction in the budget deficit, growth stimulus and amendments to tax policies. The projected budget shortfall which has to be raised this year was reported at N$ 9.2 billion (down from last year’s 11.4 billion), around 5.5% of GDP and shows that the team behind the spending is well on their way with the belt tightening exercise and the deficit has now been reduced for two consecutive years in a row. Although our current debt levels hover around 45% of GDP is high looking back, it does seem we have slowed the tide. Looking at the forecast, debt is expected to peak at 46.2% in 2019/20 and remain well below the 50% level. We’ll have to make some work around the revenue side of the budget which is heavily reliant on SACU revenue which is around 31% of the total revenue, VAT collection at 24% and Sanlam Namibia All Namibian Fund April 2018 which is around 31% of the total revenue, VAT collection at 24% and Income Tax on Individual’s at 19%, all of which is expected to be under pressure in the short term.

Our preliminary GDP figures have also been released and for the first time, in quite some time, Namibia is showing a yearly contraction in the GDP numbers. This is due to a combination of events happening in and around the Namibian economy from the slump in construction activity, depressed commodity prices, disruptions at mining operations, severe drought, high food inflation, drop in regional trade and lagging government payment. None of this is new or haven’t been spoken about before, but we can now start seeing the extent to which this has affected our economy where GDP growth for 2016 stands at 0.7% and a yearly contraction of 0.8% for 2018. A far way off from the 5% plus numbers we’ve seen the period before 2016.

On the ratings front, Namibia remains outside the investment grade band, while South Africa received a bit of a respite in March when Moody’s left their sovereign credit rating unchanged at Baa3 (lowest investment grade), but changed outlook from negative to being positive on future expected rating changes. In order for Namibia to recover its InvestmentGrade rating, the government will have to commit and continue on the fiscal consolidation path and most likely start looking at the unsustainable large wage bill, spend on defence and security, and how to bring these items to sustainable levels. Rating agencies is also keeping a close eye on the ability of the tax authority to collect tax due and progress on the legislation that may chase away investment into the country.

Inflation continued on its downward trajectory with the average inflation for the first quarter recorded at 3.5% compared to 5.2% recorded in the last quarter of 2017. This was due to short term moderation in food inflation, lower rentals and a stronger currency. The outlook for inflation remains subdued for the year ahead and we expect the inflation to only pick up moderately from current levels but remain well below 6%.

Market review
After the euphoric end to the markets in 2017, the first quarter of 2018 was the worst quarter in over eight years for the JSE listed equities. The biggest contributors to the 6% fall in the FTSE/JSE All Share Index were Naspers (-16%), British American Tobacco (-15%) and Reinet (-16%). For the shares listed on the NSX it was a much better quarter with the NSX Overall Index delivering a return of 7% and the Local Index helped by the 15% increase in Namibian Breweries delivering a return of 6.3% for the quarter.

Bonds have rallied strongly to a point where we’re seeing a real yield of around 3% on the South African 10 year point; we consider this to be a fair return over the long term and have moved to lower our exposure to nominal bonds over the period. The Namibian risk spread over the 10 year SA yield hovered around the 1.8% with no real direction this year and it seems the market was pretty neutral on the borrowing outlook after the delivery of the budget. With the contraction of SA yields the Namibian Bond Index delivered a return of 4.6%. We expect these spreads to move closer to their long term levels of around 1.25% over the medium term.

Namibian Treasury Bill rates continues in the upward trajectory from October last year and we’re seeing the 1 year bills clearing close to 8.5% levels. This is quite attractive considering a bond investor has to go out to 4 years and invest in the GC22 to get the same type of yield.

Asset allocation

Over the quarter we have lowered the allocation to nominal bonds in the fund. This is in line with our view that the current real returns have moved closer to our long term neutral levels. For the All Namibian Fund the move was mostly from longer term Nominal Bonds to shorter term TB’s where the investor is being given a yield of 7.8% on 3 month instruments and 8.4% on 1 year instruments. Comparing this to the IJG Bond Index which has a duration of 4.2 years, the current yield is only standing at around 9.1%.

We also used the volatile markets to increase the fund’s exposure to Namibian Local Listed shares and purchased a basket of Capricorn Investment Group, FNB, Nambrews and Oryx shares over the quarter. The fund is currently exposed to 8.2% locally listed Namibian Companies.

Sanlam Namibia All Namibia Fund

As we shake off the dust from 2017 and take stock of the year that has passed, one can agree that it was definitely one of the more interesting and volatile years from recent memory with some unexpected developments. Namibia and South Africa flirting with credit ratings outside of the investment grade bands, new regulation developments channelling more funds in to Namibian markets and some significant political changes to our neighbours here in Southern Africa. With all of this volatility and many market commentators being negative, 2017 favoured the investor holding more local assets especially in the equity space, even with the inclusion of the drop in value of Steinhoff shares. Looking down the road into 2018, one has to wonder if short term trends will continue or if this market is positioned for more volatility and uncertainty. Positioning portfolios requires patience and commitment to long term goals where one has to keep looking for well positioned, positively valued investments and not get swept along by short term profit seeking investment decisions.

Namibia’s economy

Inflation both for Namibia and South Africa remained below 6% for the 4th quarter of 2017 with our December year on year inflation rate standing at 5.2% and the average rate for 2017 at 6.2%. The contributors to the December inflation numbers was mainly housing, water, electricity, gas and other fuels at 9.2%, education at 7.8% and transport at 6.7%. While the food, alcoholic beverages and tobacco ended the year on a downward trend after their large contribution to inflation numbers in the 3 rd quarter. We’re expecting NCPI to remain relatively in line with the SA inflation target band of 3% to 6% and our forecast is for an annual average of 5.1% in 2018. The risk for an unexpected move in the inflation number stems from the potential for exchange rate volatility as well as the impact of commodity prices in the short term.

The economic growth numbers continue to disappoint and together with revisions made by the Namibian Statistics Agency, we have had only one positive quarter in the last year and a half. The 2016 full year GDP growth stood at 1.1% and the Bank of Namibia’s current projection of growth for 2017 at 0.6%, which means the 4th quarter growth of 2017 needs to come in at 7.1% which seems to be a bit of a stretch. Construction remains one of the main detractors from growth and as it now stands this sector has contracted for the 7th straight quarter, mainly due to the cut in government expenditure on construction projects. There is a strong likelihood that 2017 will be the first annual contraction that Namibia records in the last decade.

The Monetary Policy Committee of the Bank of Namibia cited support for the domestic economic growth, slowdown in inflation and private sector credit extension as to keeping the repo rate unchanged for the last quarter of 2017 and in line with that of South Africa at 6.75%. Although we’ve seen a general upward trend from the US Fed Fund Target rate since late 2016 and a recent increase in UK Bank of England Repo rate, the market is still pricing in a drop of approximately 50 basis points towards the middle of 2018.

The 2017/18 mid-term budget review did not bolster confidence in the objective of fiscal consolidation when we saw unbudgeted expenditure and additional strategic resource allocations not previously included in thebudget. The current projected budget deficit for 2017/18 has been revised from N$4.04 billion to N$9.4 billion (3.5% of GDP) which was mainly attributed to outstanding invoices coming out of the 2016/17 period. Revenue collection seems to be on track with prior years and the much relied on SACU revenue of N$9.8 billion has been received to date. Unfortunately, the SACU revenue which makes up more than 30% of our total revenue is expected to remain under pressure in the medium term, due to the low growth environment across the SACU regions. Further cutting on expenditure will become very difficult as the public-sector wage bill has now steadily increased to over 40% of the total government expenditure, cutting this could risk possible public unrest. Another option is further cutting of developmental projects which has already seen minimal allocations compared to previous year’s budgets.

Unfortunately, the medium term budget policy statement did not seem to quell the concerns from the international ratings agencies and Fitch cut our long term outlook to BB+, following Moody’s decision in August to rank our debt instruments outside the investment grade band. South Africa is similarly rated outside the investment grade band by Fitch and S&P, with only Moody holding the rating at Baa3 (lowest investment grade) stating it’s on review for a downgrade.

Market review

The exchange rate has had a favourable quarter with the Namibian Dollar strengthening from 13.55 to 12.38 against the US Dollar, levels last seen in 2015.

Bond yields continued on a bumpy path during the 4th quarter with yields going sharply up and then coming almost all the way back down, going almost full circle during the quarter. The Namibian 10-year government bond yield started the quarter at 10.44% and subsequently traded weaker during October, in particular after the delivery of the South Africa Medium Term Budget Policy Statement when it went up to 11.16%. It continued weaker during November, but traded much stronger during December as local interest rates rallied during the last few weeks of the year. The local 10-year yield made back almost all the lost ground and finished the quarter within 5 basis points where it started the quarter, ending the year at 10.47%. Looking at the premium over the SA bonds it seems that the trend of lowering premiums (Namibian bonds trading more favorably compared to their SA counter parts) has come to an end during the 3rd quarter and has remained mostly constant, the current premium over SA 10 year yield rate is 1.65% (still quite a bit off from our 5 year average of around 1.2%).

With the premiums staying mostly steady for the quarter and yields doing the full circle, the IJG Bond Index showed a return of 2.65% for the 4th quarter outperforming the IJG Money Market index which delivered 1.99% for the same period. On the short term government treasury bill auctions we’ve seen the yields picking up in the 4th quarter after 6 months of lowering yields, with the current 1 year TBs clearing at around 8.6% compared to the 7.9% from September. It seems that there is more pressure on government to raise financing on the short side compared to the longer bond auctions.

The events surrounding Steinhoff dominated headlines during December with the local equity and credit markets both being affected, but this did not detract from how well the equity markets performed in total for 2017. The JSE All Share delivered a total return of 20.95% for the 12 months, the NSX including dual listed shares delivered 26.45% and the Locallylisted shares 14.40%. Asset allocation As an investment house we remain positive on bonds and neutral local cash and equity. With the good performances of the equity markets in 2017 we still see the Namibian and South African equity market to be selectively attractive. The fund holds positions not only in the dual listed shares, but also in the locally listed Namibian companies, which although has lagged their SA and Dual listed counterparts in 2017, offers a reasonable upside outlook from current levels. We slightly increased our position in conventional bonds as the asset class offers an approximate 5% real yield, which is attractive when compared to domestic bonds of similarly rated countries. Inflation remains under control and well within the acceptable level. Cash continued to be enhanced over the quarter via the addition of select credit assets at attractive yield pick-ups over money market rates.