Market Review

Central bankers continued to take centre stage, with violent mood swings gripping financial markets due to changes in policy direction. Until May, yields rallied strong across the main developed markets. German Bunds hit record lows on signs that a global recovery was underway, leading to talks of the beginning of a great rotation from bonds into equities worldwide. Since then, however, we saw a sell-off, with US and UK yields reaching twoyear highs. However, at the end of the quarter, the Fed wrongfooted financial markets when it unexpectedly announced its bond purchase programme would continue unabated.

Globally, equity markets had a very good quarter as investors focused on the improving global economic backdrop. Major emerging market equities rebounded some 6% during the quarter, outpacing the main developed markets - except for Japan. The JSE SWIX also had a strong quarter, up more than 11% and outperforming its emerging market peers in dollar terms. The JSE was led higher by a strong rebound in resource stocks, which gained close to 18%, while financials lagged. The Platinum stocks led the way, with Amplats up 48% and Implats up 33% after their interim results surprised positively from a low base. The diversified miners saw strong gains, with Anglos up over 28% and Billiton 17% higher. However, gold miners remained under pressure, with Goldfields down more than 9% and Anglogold Ashanti declining 4% during the quarter.

However, risks remain around the political gridlock with regards to the US Budget and debt ceiling. In Europe, Italy appears to be rudderless and once again the Europeans may have to use the European Central Bank as a back stop. So far financial markets have shrugged off these risks with a sense of deja-vu given that US fiscal policy uncertainty has been with us since April 2011 when a complete shutdown was averted. More recently a last minute deal was struck in December last year to avoid falling off the fiscal cliff.

In the commodities space, the Brent oil price spiked to $116/barrel on the prospect the US would engage in military strikes on Syria. But, with such military action ultimately taken off the table and sanctions on Iran linked to their nuclear ambitions potentially being called off, supply from the Middle East could well increase and the oil price closed the quarter at around the $109/barrel mark.

In contrast to the improvement in manufacturing activity globally, the SA economic backdrop worsened during the quarter, with manufacturing production contracting in September on the back of strike action in a number of industries and the auto sector weighing heavily on the economy.

SA also faces twin deficits. The trade deficit in August widened further from R14bn to R19bn, putting further pressure on the current account deficit. It is a concern that the weak currency has not fed through to better exports. This also points to the need to rein in the import of non-return generating goods. In the case of our budget deficit, there still remains a risk of a credit downgrade. While the currency has now weakened considerably, it is remains exposed to any weakening in our terms of trade. In addition, the consumers remain over-indebted and have been relying on expensive unsecured loans for consumption.

What SIM did last quarter?

The Fund delivered a solid return of more than 12% during the quarter, which aggregates to more than 29% over the past year. This is very attractive compensation for investors who backed This is very attractive compensation for investors who backed equities in an environment where many perceive the glass as half empty. We continued to add to our position in Sasol, which is now the largest position in the Fund. Naspers is now the Fund's second largest holding after advancing by over 27% during the quarter, with its investment in Tencent up 63% in Hong Kong this year alone. We also upped our exposure to Anglo American, which had underperformed substantially prior to the quarter.

What added to, and detracted from, performance

Our positions in resource heavyweights added considerable value this quarter. Heavyweight Anglo American was up more than 28% after delivering earnings above expectations and the new CEO, Mark Cutifani, articulating a cogent strategy for the group. BHP Billiton was also up 17% during the quarter. Sasol gained 11%, beating expectations by reporting earnings growth of 25%. The stock trades on a PE of 9x. Our position in Steinhoff also added value, with the counter increasing almost 46% during the third quarter alone after delivering impressive results. The company is successfully bedding down the acquisition of Conforama in France and is now one of the largest household goods retailers in Europe.

On the downside, the Fund was not exposed to some of the Platinum miners, which had a particularly strong run during the quarter. Amplats was up close to 48% and Impala Platinum up more than 33% after being beaten down since the beginning of the year. Instead, the Fund is exposed to Northam, which is one of the lowest cost producers of platinum in SA and gained more than 32% during the quarter and has outperformed its industry peers this year. As value investors we are not exposed to growth stocks, such as Aspen, which rose close to 16% during the quarter and is trading at a lofty historic PE of 30x.

SIM Strategy

As the JSE scales new record highs, we now have fewer opportunities to find bargains and we have thus cast our net even wider. Our main focus at present is to avoid capital losses for our investors and we prefer stocks with global exposure, such as Naspers, MTN, British American Tobacco, Steinhoff and the diversified miners. These stocks still trade at valuations that are more attractive than many of the more domestically-focused companies.

Market Review

Outgoing Fed Chairman Ben Bernanke took centre stage as he warned the markets that the Federal Reserve was going to 'taper off' its quantitative easing programme. As a result, we saw a sharp bond market sell off, with liquidity exiting emerging markets faster than whistleblower Edward Snowden could get out of Hong Kong.

This quarter's economic strain was given a human face, with riots that started in Istanbul's Taksim square spreading to the streets of Sao Paulo and crowds amassing in Cairo's Tahrir square yet again, two years after toppling the previous regime - this time to get rid of the new President. The MSCI Emerging Market equity index fell more than 9% in dollars during the quarter, the worst start to the year since the 1998 Asian financial crisis. In sharp contrast, developed markets did better, with the S&P 500 ending 2.4% higher. It is no surprise that Brazil's Bovespa was down 23% and Turkey off almost 17% in dollars during the quarter, as investors were reminded that the emerging market risk premium was alive and well.

If the prospect of taking the world's largest economy off life support was not enough to scare investors, the Chinese economy went into full cardiac arrest as its money market system saw its arteries blocked up and interbank rates spike up to double-digit levels in a move reminiscent of the Lehman Brothers cash crunch that gripped financial markets in 2008. While it is evident that the new Chinese administration is trying to stem the excesses of the past and redirect liquidity to more productive economic sectors, this event was evidence that the rebalancing exercise away from investment-driven growth may bring its fair share of panic attacks and the economy stands to miss a few heartbeats during that surgical process.

The JSE SWIX ended the quarter close to flat in rand terms after a strong rally at quarter end. However, the picture looks less rosy in dollar terms, with the Index down more than 8% - which was, nonetheless, slightly better performance than its emerging market peer group. Year to date, the JSE is down close to 14% in dollar terms, due largely to the rand's sharp depreciation against the greenback - making it one of the worst performing currencies in the world.

Commodities continued to suffer a rout during the quarter. Gold led the downside, declining 23% in dollars during the quarter, with platinum slumping close to 15%. Both commodities are important exports for our local economy. Industrial metals fared slightly better, with the copper price down just over 10% during the quarter. We have seen massive liquidation in ETFs as a result, with one of the largest funds in the world, the famed Spider Gold ETF shriveling to less than 1000 tonnes after having lost 40% of its holdings this year. To put that in perspective, that is more than double SA's annual gold production, which collapsed to the lowest levels seen since 1905 last year!

What SIM did last quarter?

The Fund was marginally positive during the second quarter after a very good start to the year. At close to 7% of the Fund, MTN - our largest position - was up 14% and the stock offers an attractive forward dividend yield of 7%. Sasol, our second largest holding, gained 2% during the quarter on a weaker rand oil price. We added to our position in Naspers, which is now the third largest position in the Fund. Naspers also produced solid results, with a strong contribution from associates Tencent (China) and with a strong contribution from associates Tencent (China) and Mail RU (Russia) and robust performance delivered byPay TV.

What added to, and detracted from, performance

Of the positions that added value, Naspers is the most noteworthy as it outperformed the market by some 27%. British American Tobacco also outperformed the JSE by more than 3% and Sasol was up 2%,

On the downside, the diversified miners, Anglo American and BHP Billiton, remained under pressure, with Anglos down some 20% during the quarter. The market panicked on indications Chinese growth was slowing down, with manufacturing production contracting and the new leadership wanting to move away from an infrastructure-intensive growth path, which would be negative for commodity demand.

SIM Strategy

After a very strong run, we believe the stock market is now trading above its fair intrinsic value. We find that globally exposed stocks are not highly rated by investors, e.g. the diversified miners, Naspers, Old Mutual, British American Tobacco and SAB, and are thus less likely to lead to capital losses if the hot money exits the JSE. We estimate that only 20% of the companies in the portfolio will be hindered by a weaker rand and, on a selected basis, have also been accumulating some blue-chip names in developed markets that are trading at valuation discounts to their equivalents on the JSE.