Market review Global equity markets recovered strongly from the sell off at the end of last year. The S&P 500 in dollars gained 13.1% the MSCI World gained 11.9% and the MSCI EM lagging slightly gained 9.6%. The most surprising development in markets was the sharp rally in long dated developed market government bonds; the yields on US 10yr maturity bonds declined from 2.69% at year end to 2.41%. The yield on 10yr German bonds declined from 0.24% to -0.07%.

The US Congress and President Trump ended the longest government shutdown in American history on 25 January 2019 without reaching consensus over the funding amount for an expansion of the US Mexico border wall. In the UK Prime Minister May failed to gain sufficient support for her Brexit deal, but did manage to persuade European leaders to postpone the Brexit deadline until mid-April. In the last week of March the UK parliament voted on no less than eight options and has yet to find majority support for any proposal. As things stand it looks like the UK might leave the EU on 12 April without a deal.

South African markets lagged behind global equities gaining 6.8% in rand (marginal rand weakness detracted 0.9% for the US dollar based investor). SA bonds delivered surprisingly strong performance gaining 3.4% over the quarter.

Mr Mboweni delivered the Medium Term Expenditure Framework (MTEF) in February. Government revised growth forecasts lower, made no adjustment to tax brackets despite inflation and promised R23bn a year to Eskom to help it restructure its operations. The sustainability of government finances depends on the ability of the economy to achieve projected growth rates. The Eskom load shedding experienced in the first quarter makes it that much harder to achieve. Already, in March government revenue statistics showed much larger than expected shortfalls. Moody’s, despite the obvious challenges, did not downgrade SA government debt to junk.

Performance

Strong equity markets in the first quarter of 2019 can be attributed largely to the performance of rand hedge stocks including gold, platinum and resource shares. This performance was not driven by a weaker currency (the R/$ closed largely unchanged for the quarter), but by the prospect of lower for longer global interest rates and higher commodity prices.

For the quarter, our portfolios outperformed their benchmark. Despite holding no gold shares, our investments in Anglo American (+22%), BHP Billiton (+23%) added positively to performance. Other significant contributors included British American tobacco (+29.5%) and Quilter (+25%).

Domestic stocks (in particular the retailers) were heavily sold off and our limited exposure to certain overpriced domestic stocks assisted relative performance.

Finally, investing is in many respects a negative art. Avoid losses is as important as the desire to make a profit. In this regard, many of our best decisions were to avoid many poor investments which have come under significant scrutiny the past quarter. These include Aspen (-31%), Blue Label (-31%), EOH (-66%), Omnia (-40%) and Tongaat (-61%).

This has undoubtedly been one of the more anxious periods for South Africans. In addition to having to deal with electricity outages, corporates are under pressure to cut costs in order to protect profits and returns. Consumers are having to deal with higher VAT, fuel and administered prices (such as electricity) and this is impacting on discretionary spend. We remain cautious on domestic South Africa and do not see a dramatic improvement in economic growth in the shorter term.

In this environment we continue to seek out mispriced opportunities where we have above average conviction. Our objectives are to ensure we focus on constantly improving the quality of the portfolio while reducing the role of chance which unknown macroeconomic events may have.

In this regard, the heightened uncertainty has created some good opportunities. New positions in the portfolio include AVI, ABInbev and Dis- Chem. We reduced our investments in Altron, Adcorp and Tiger Brands.