Market overview

The first quarter’s rally in global and domestic growth assets subsided in June as economic and political risks resurfaced. Globally, the US Federal Reserve (Fed) hiked interest rates for the second time in 2017, increasing its short-term lending rate from 1% to 1.25%. Similar to previous hikes, the impact on financial assets was muted, as the market has been successful in pricing these in before they happen. Within emerging markets (EM), most of the countries that struggled in 2016 continued to see their currencies gain momentum against the US dollar. The JSE Shari’ah Equity Index has lost 4.0% for the year-to-date. The index has a substantial weighting to Resources, greatly exceeding that of the SWIX.

Portfolio review

The STANLIB Multi-Manager Shari’ah Balanced Fund of Funds returned 3.1% over the past 12 months and 5.5% p.a over the past two years. The Fund has outperformed both its composite benchmark and peers since inception two years ago. At an underlying fund level, the Kagiso Islamic Balanced Fund returned 2.5% for the year-to-date, benefiting from the strong performance of some of their highest conviction holdings - especially amongst the mid-caps - as well as strong foreign stock selection. The Old Mutual Albaraka Balanced returned 1.0% for the first half of 2017, a subdued performance relative to its historical top-ranked performance in the global Shari’ah space.

Portfolio positioning and outlook

Looking forward, we expect the Fed to raise rates once more in 2017 on the back of improving economic data. This gives the European Central Bank room to start winding down its quantitative easing program in 2018. In SA, the political environment remains fragile and our expectations of economic growth are now lower than they were at the start of the year.
Domestically, Kagiso in particular is positioned in areas with low foreign interest, such as PGMs – through Amplats, Royal Bafokeng Platinum – UK property and compelling mid-cap stocks. They remain wary of expensive foreign SA favourites, particularly the large cap industrials that are starting to disappoint investors. Kagiso also has material exposure to global companies. We believe that the current portfolio reflects our best investment view for Shari’ah investors over the long-term, and will continue to manage the Fund tactically to protect against any unintended risks when necessary.