The Sanlam Select Wealth Protector Fund changed it's name to Amplify SCI Wealth Protector Fund, effective from 01 December 2019.

Overview

World economic growth continues to be revised lower The International Monetary Fund (IMF) continues to revise projections for the world economic growth rate lower. The latest revision forecasts global growth in 2019 to slow to 3.2%, compared with the previous estimate of 3.3% made in April 2019. This compares with a global growth rate of 3.7% in 2018. In a synchronised slowdown, the IMF expects economic performance in 2019 from the US, Europe and China to be below 2018 levels, with Europe expected to record the weakest growth. Chinese industrial production growth continues to fall and is currently at alltime lows in China’s modern era. Although the IMF expects a recovery in 2020, the news flow continues to be negative and it is likely that next year’s forecasts could, in the future, be revised still lower.

There is no sign that trade relations between the US and China are warming. On the contrary, the latest utterings suggest that the Trump administration is considering quantitative restrictions on US private sector investment in China. This would represent an escalation of the differences between the two countries that is likely to have a negative impact on investor sentiment. On both sides since late last year, as a result of the trade standoff, export tariffs have been steadily increasing and this has had a negative impact on global trade. As expected, the decline in US exports was the largest contributor to the deceleration of the economy in the second quarter.

Brexit still dominates European politics. The UK government continues to adopt a very hard-line approach to any opposition to its objective of delivering a break from the European Union on 31 October. Parliament and the Executive are currently firmly gridlocked and it is apparent at this stage that all options from a hard no-deal Brexit to no Brexit and everything in between are still possible with neither side in a consolatory mood.

Central banks around the world have responded to the faltering economic prospects with a further round of monetary easing, but interest rates are currently so low that its effectiveness is questionable. Currently, according to the World Bank about a third of global debt is offering a negative yield.

Global currencies continued to reflect the mid-year realignment with the US Dollar strong relative to Sterling and the Euro, driven largely by the move to quality and higher interest rates. The Rand remains weak but has been supported by the high interest rates on offer.
The PGM basket continues to outperform most commodities Both palladium and rhodium prices increased over the month of September, largely driven by potential supply constraints. As expected, Middle East tension drove the oil price higher, but fortunately the price closed below intra-month highs, although a more serious conflict could have a very negative impact on the future oil price. With the exception of nickel, base metal prices were generally weaker over the month.

South Africa’s growth prospects continue to disappoint South Africa’s economic performance continues to disappoint amid calls on the government to adopt a more growth-focused economic policy increasing by the day. Confidence remains fragile as the very necessary restructuring of the parastatals and municipalities holds the prospect of job cuts and further tax increases, both impediments to a meaningful recovery in the short term. There is some evidence of an embryonic pick-up in the construction sector, coming after many years of steep declines. This was reflected in a good share price performance from the sector in the month.

Global equity markets in a trading range
Global equities have been trapped in a trading range for the last two years. Although the historic bull market is very mature and valuations are modestly stretched, the current low interest rate environment is, in our opinion, not creating a sufficiently attractive alternative to encourage withdrawal of capital from equity markets. However, the risks are skewed to the downside given the limited scope for further monetary policy easing and the increased likelihood of negative earnings revisions. Global bond markets are not offering reasonable value either. Only in the US are 10-year yields roughly in line with the inflation rate, but still not offering yields in line with long-term averages. Elsewhere, developed market yields are either negative or only barely positive, as in the case of UK bonds.

South African financial markets require an injection of confidence South African equity markets eked out modest gains in September. Resources lost ground in the month but still remain the top-performing economic group this year. Despite overall declines from mining shares, platinum shares were up in the month. Industrial shares also contracted in September but financials recovered strongly from the prior months’ losses.

Indices have been driven by the divergence of strong performances of global and export-orientated companies and poor performances from companies reliant on SA Inc.

Given the likelihood of the SA economy remaining weak for a protracted period and consequently earnings growth remaining lacklustre, valuations for domesticallyfocused counters are not compelling. Some of the large offshore-exposed companies, including British American Tobacco and Prosus, appear to be offering reasonable value at these levels.

SA bonds are offering very high real yields but are hostage to SA’s sovereign credit rating and economic woes. A downgrade by Moody’s, the only ratings agency to still maintain SA debt as investment grade, would be bad news, most likely preventing real yields from contracting much.

Portfolio Positioning
The precious metal miners were the major contributors to performance, primarily as a result of higher precious metal prices which were underpinned by low valuations. Our positions in Impala Platinum, Sibanye Gold and Northam Platinum all contributed meaningfully to performance.

Sasol detracted from performance as it delayed its annual financial results for a second time to allow for a more in-depth investigation into what went wrong during construction of its US$13 billion Louisiana chemicals project.

We increased exposure to Sibanye Gold, Anglo American, the Euro Stoxx 50 ETF and MSCI Emerging Markets ETF. We reduced our exposure to domestic banks after their strong rally in September. We took profits on the New Gold Platinum ETF.

Financial markets bounced back from May's retreat Global markets bounced back strongly from May's contraction despite many of the markets' pressing issues remaining unresolved. Firstly, while the trade negotiations between the US and China are back on track, it will take compromise from both sides to reach an agreement.

The global economy is currently going through a synchronised slowdown that has seen developed central banks pivot towards more accommodative monetary policy. This more dovish stance by developed central banks has opened up room for emerging markets to also cut rates. Given the limited room for conventional monetary policy, we may yet see central banks turn more aggressively towards fiscal policy in an attempt to avoid a recession in the years ahead.

The S&P 500 Index advanced 6.9% in June, representing one of the strongest moves seen in recent times, driven, in the main, by the pivot on interest rate policy from the US Federal Reserve.

Much has been said about the demise of the current global equity bull market that, by many measures, is very mature. Earnings have already enjoyed a very strong advance over the last half-decade and are looking like they are in the top-of-cycle range. It is unlikely that earnings growth on its own can sustain further equity gains. The key risk to the current equity bull market would be earnings disappointments into 2020, or an unexpected rise in interest rates resulting in an upward spike in equity yields.

South African markets followed suit

In June, the FTSE/JSE All Share Index (ALSI) produced a total return of 4.8%, having fallen by 4.8% in May. This brings the year-to-date return of the ALSI to 12.2%. All sectors contributed to the performance in June, although the Financial sector and the Resources sector outperformed the Industrial sector by 3% and 2% respectively. The more broadly-based FTSE/JSE Shareholder Weighted All Share Index experienced a more modest advance but was still up 3.1% in the month and by 9% year to date.

Bonds, too, enjoyed a good month with yields at the long end softening by about 20 basis points. Real yields remain high by historical standards. However, the Property index continues to lag, being barely in positive territory year to date. As the sector generally lags the economy, distribution growth is likely to disappoint for several years to come.

SA's economic performance is cause for concern

The SA economy is currently trapped in a cycle of low economic growth and high unemployment that, if not arrested soon, could result in a major crisis. The current trajectory is leading to greater levels of poverty and inequality that increase the probability of economic instability.

Spending on badly needed infrastructure is also declining as seen in the demise of the local construction industry. Barring an export-led windfall, the only sustainable path to higher economic prosperity is to increase employment, bringing in more people into the consumer economy. Despite the President's State of the Nation Address, we have yet to see decisive action taken on critical structural reforms that are necessary to move us out of the low-growth environment.

The currency has been surprisingly strong

Given the country's disappointing growth outlook it might have been expected that the Rand would remain weak; however, this has not been the case. A consequence of our low-growth environment has seen imports decline and with rising commodity exports the country has experienced an improvement in the external trade balance over the recent months. Inflation has also been stable, surprising most economists on the downside. These metrics have underpinned the strong Rand and are likely to lend stability to the currency in the short term, in spite of the weak fundamentals.

Portfolio Positioning

The fund remains conservatively positioned with a relatively low equity weighting. Within equities, we have a higher weighting in the Resources sector and Industrial Rand hedges, all of which are still enjoying earnings growth as a result of a growing global economy. South African-focused stocks continue to struggle in the current low-growth environment. SA corporate margins are being squeezed by increasing costs, which corporates are unable to pass through to consumers given the poor economic backdrop. If the broader SA economic backdrop does not improve, we expect that SA-focused stocks will continue to struggle to deliver real returns, increasing the probability of a value trap.

Over the month the fund reduced exposure to Naspers, Sasol, ABSA and FirstRand. We increased exposures to British American Tobacco, Impala Platinum, and Philip Morris.

Unchanged from the previous quarter, our fixed-income assets remain predominantly invested in the floating rate subordinated debt of SA's top five banks, where we are earning approximately 120 basis points above government bonds with no equivalent duration risk. Investment opportunities in the corporate debt market outside of the banks are few and far between, with huge oversubscription, because of the lack of issuance, driving the yields down to unattractive levels. While real yields on longer-duration bonds look superficially attractive, the deteriorating fiscal position of the country means the probability of a ratings downgrade into 2020 remains high. As a result, we continue to prefer shorter duration assets.

Market overview
Global economic growth is likely to slow into 2019 The global economy continued to experience non-synchronised growth across the three major economic zones. In the United States, growth remains strong as the Trump tax cuts fuelled strong internal demand. Although US interest rates are rising they are still low relative to historical levels. The labour market in the US is very tight and we are seeing signs of building wage inflation. Output gaps continue to narrow and risk of further rate hikes seems high. The European economies are enjoying steady growth, but growing trade disputes could dampen prospects for the export dependent economies. Chinese economic growth is expected to slow from a relatively high base largely driven by slowing infrastructure spending. A further aggravating factor is the continued rise in the price of oil. If prices continue to rise from current levels it could trigger further pressure in emerging markets and weigh on global growth. As a result, the risk to global growth in 2019 is skewed to the downside.

South Africa’s economic prospects remain weak
The South African economy remains weak, largely driven by poor demand and selfinflicted structural problems. Disappointingly, the formal employment sector continues to shed jobs, adding further downward pressure on consumption spending. The unwelcome rising cost of fuel driven by both an increase in the dollar oil price and the weak currency will also negatively impact consumption.

The stimulus package recently announced by President Ramaphosa, although well meaning, is unlikely to have much impact on overall growth as it will be funded from within the existing budget and is relatively small compared to the size of the economy. Having contracted in the first two quarters of the year, it is likely that even the subdued forecasts of growth for the full year will prove difficult to achieve. Negative sentiment towards emerging markets has impacted local equities Local equities were under pressure in September with the ALSI declining by 4.2%. The resource sector continued to significantly outperform the financial and industrial sectors achieving a positive return for the quarter. However, this return was helped by a very strong recovery in the platinum sector off a low base with Impala and Amplats both enjoying a strong rebound. Year-to-date the 21% return from resources is well ahead of the financial and industrial sector largely driven by currency weakness.

Property continues to contract but bonds were steady
The property sector continued to contract, falling by 1% over the quarter. The falls were not limited to the Resilient group of companies as Growthpoint, the industry leader, also had a poor quarter, contracting by about 9%. Bonds had a flat quarter, producing a 0.8% return as long-dated yields rose by about 0.25% over the quarter.

The rand under pressure
The rand had a very poor quarter, declining from R13.74 to R14.14 against the dollar, a decline of roughly 3%, and faring similarly against the other currencies. At it worst the rand hit R15.4 to the dollar but late in the quarter the currency did stage a welcome recovery. However, sentiment remains very fragile and further falls cannot be discounted. Fortunately, the rand did not suffer the losses experienced in the Turkish lira or the Argentine peso. Commodity prices remain largely flat to down except for oil Precious metals had a largely flat quarter with only rhodium having a strong advance of about 14% over the quarter. Since June 2016 rhodium has risen from 650 $/oz to 2589 $/oz, an advance of 300%. However, for the local producers the basket price has risen significantly as a result of the higher rhodium price and currency weakness. The platinum sector should produce significantly better results in the second half of the year. Base metals have on average declined over 2018 in US dollars and no major advance in US dollar base metal prices can be expected until China resumes its historically high spending on infrastructure. Against the trend of precious and base metals the oil price continues to strengthen, helped by the recent re-introduction of sanctions against Iran. As the world supply/demand balance is currently tight, further rises towards $100/bbl cannot be discounted. The key risk to the SA economy is rising inflation The key risk to the South African economy is a currency induced increase in the inflation rate requiring a tightening in monetary policy. The latest inflation numbers to August have yet to reflect the impact of the weaker currency and the rising fuel price, and at 4.9% remains well within the inflation targeting threshold of 6%. However, the trend is now up and higher numbers must be expected in the months ahead. If the inflation number settles above 6% the Reserve Bank may be forced to raise rates. Given the fragility of the economy this would be most unwelcome and it remains uncertain how the consumer would respond.

Portfolio Positioning
Equities
The fund remains underweight equities. Domestically focussed equities continued to underperform in the month of September on the back of negative sentiment toward emerging markets, as well as a slew of disappointing earnings updates which fell well short of market expectations. The repositioning of the portfolio earlier in the year away from expensively priced domestically focussed companies into attractively priced rand hedge counters continued to benefit the fund. Notably, two of the biggest companies listed on the JSE, MTN and Aspen, suffered significant share price declines over the quarter of 18.8% and 34.4% respectively. Truffle has not held positions in either of these stocks. Over the month, the fund increased exposure to Anglo American, Sasol, African Rainbow Minerals and The Foschini Group. These increases were funded by sales in Growthpoint, British American Tobacco, Redefine Properties and Nedbank Group.

Fixed income
The fund remains short duration and has no exposure to fixed rate long duration bonds. We remain focussed on the shorter end of the yield curve through floating rate notes where we continue to earn a significant premium to the longer end of the curve without the same duration risk. Inflation risks both domestically and globally are building with risks to the upside especially if the oil price remains at current levels. The strong US dollar and reduced global risk appetite and mounting local fiscal slippage concerns suggest risk to local yields are to the upside.

Foreign assets
We have remained defensively positioned with higher than normal cash holdings. We are underweight global equity largely on the back-valuation concerns. Headwinds of tighter US monetary policy and an escalating trade war could see risk aversion increase in the months ahead. We expect increased volatility to provide us with better entry points into global equities in the months ahead.

Contributors and detractors
Top contributors for the month included Hulamin, Mitsubishi Corporation, Old Mutual, Anglo American and Investec Australia Property. Detractors included Sappi, Sasol, Naspers and Growthpoint.