Market overview

Global equity markets recovered strongly from the significant sell-off in the fourth quarter of 2018, gaining 12.6% in rand terms as trade tensions between the US and China eased following months of negotiations. The US Federal Reserve provided further impetus to the recovery with their more dovish tone. European equities bucked the trend, retreating 0.8% for the quarter on the back of a broad economic slowdown in the region. The European Central Bank (ECB) retaliated and pledged more support for the economy, committing to keep rates unchanged this year and pledging additional stimulus when needed. SA equities benefited from the global recovery and the JSE All Share Index returned 8.0% for the quarter. The Capped SWIX gained 3.9%. Resource shares returned an impressive 18.0% while listed property lagged equity. Local bonds rose 3.8%.

Portfolio review

The Fund returned 6.5% for the quarter, 1.7% ahead of the average peer fund. The overweight exposure to resources and high global allocation assisted performance relative to peers. Sizeable allocations in Naspers and British American Tobacco (BTI) also contributed and it was pleasing to see BTI recovering after a tough 2018.

Coronation had an exceptional quarter, with many of the stock picks that took strain during 2018 recovering. Big contributors include Naspers, BTI, Anglo American, Northam Platinum and Impala Platinum. Coronation¡¦s relatively high allocation to SA equities of approximately 68%, further assisted performance. They maintain their position in MTN and large property exposure.

Foord underperformed as a result of their low equity allocation. They remain conservatively positioned in domestic assets given the weak domestic economy and struggling consumer. Their equity positioning favours globally exposed businesses.

Prudential continued their consistent performance, remaining overweight SA equities and longer duration SA bonds. They prefer resource shares with exposure to global growth -{ such as Sasol and Anglo American -{ but also find value in financials such as Standard Bank and Old Mutual. They remain underweight retail and property stocks.

Investec produced satisfactory performance for the quarter. Their local equity composition is largely invested in global cyclical companies geared to the global economic cycle and exhibiting favourable earnings revisions profiles such as Anglo American, BHP Group and Naspers, alongside more defensive companies such as AB InBev and BTI. They also have exposure to select SA Inc. plays with decent relative earnings revisions profiles and trading at reasonable valuations. These include Absa Group and Mr Price.

Allan Gray had a reasonably good quarter, but three-year performance remains exceptional relative to peers. During the quarter positions in Impala Platinum, BTI and Investec Plc contributed, while holdings in Nampak and Woolworths detracted.

The Fund's global allocation performed well in rands, fuelled by global optimism. Please refer to our global equity and bond factsheets for more detailed information.

Portfolio positioning and outlook

SSA still faces many headwinds and we are of the opinion that solid growth is not likely if severe load-shedding persists. A sustainable solution to the power crisis is critical. Our managers are cautiously optimistic around valuations for many of the SA centric companies in the Fund, while many of the global shares held provide excellent diversification benefits. There are some concerns around the negative global earnings revisions that we currently monitor, but optimism is expected to continue into the second quarter of 2019. Local bonds and income-type assets are expected to deliver promising real returns and are key ingredients in the Fund¡¦s composition. On balance, we believe the Fund is well positioned to deliver on its long-term objectives.

Market overview

The global trade war between the United States and China continued to dominate headlines during the quarter. The US intensified tariffs on Chinese goods and China retaliated. Despite the tussle between the two economic giants, the US economy remains strong. This is visible in the rally of the US dollar and their robust labour market. These positive developments gave the Fed room to hike interest rates in September from 2.0% to 2.3%.

Unfortunately, the higher developed market (DM) interest rates and stronger US dollar do not bode well for emerging market (EM) assets such as South Africa, and most EM countries saw their currencies weaken. SA fared worse than its EM peers as signs of poor economic growth surfaced during the quarter, resulting in SA moving into a technical recession.

SA equities lost 1.6% over the quarter, driven largely by poor returns from industrials. SA property lost 1.0%, while SA bonds returned 0.8%. The weaker rand supported offshore returns, leading to a 7.4% total return from global equities.

Portfolio review

The Fund returned 1.6% for the quarter, 0.5% ahead of the average of the ASISA MA High Equity peers. The Fund’s overweight position to resources and rand hedge shares, coupled with a fairly high allocation to global equities, continued to support good peer relative performance in the short and medium term.

Allan Gray’s performance has been exceptional. They continue to prefer the big rand hedge shares and equity allocation remains high at 71%. The bond allocation of around 15% is relatively defensively positioned with a very low allocation to property.

Coronation’s domestic balanced mandate has a rand hedge bias, with a moderately high allocation to equities and property. One of their largest positions, MTN, detracted from performance.

Foord is currently the Fund’s most bearish underlying domestic balanced manager with an equity allocation of around 55%. Foord has a large exposure to rand hedges, given their concerns around the SA economy.

Investec maintain focus on companies receiving earnings upgrades due to improvements in their operating environments. Among companies that are domestically focused, the likes of Absa, FirstRand, Sanlam and Standard Bank stand out. Globally-oriented companies that remain attractive include Anglo American, BHP Billiton, Mondi and Naspers. Investec is neutral on local nominal bonds.

Prudential prefers resources through counters such as Sasol and Anglo American, but also sees value in financials such as Standard Bank and Old Mutual Ltd. Long duration bonds remain a key investment for Prudential.

Portfolio positioning and outlook

The largest themes in the Fund are overweight resources and rand hedge shares, which has benefited performance over the past year. The global positioning tactically remains relatively high between 25% and 30%.

In addition to further rate hikes in the US, we expect trade wars to continue dominating headlines and this could weigh heavily on EM sentiment. Local asset prices have retreated to levels that may provide a good entry points for investors. However, the global and SA environment remains highly uncertain and we continue to emphasize the importance of having a long-term focus when making investment decisions.