Global assets continued their recovery from 2018 levels, as equities and fixed income markets continued where they left off in the first six months of the year. Recent comments and actions from central banks added to the positive sentiment prevailing in equities and bonds. Global equities delivered a strong performance year to date (+23.8% in rand terms), MSCI EM (+16.1% in rand terms) and the FTSE/JSE SWIX All Share Index (+4.3%). The Resource Sector remained the biggest positive contributor to SA performance with a YTD gain of 13%. SA bonds also delivered positive returns in September, taking YTD performance for the ALBI to 8.4%, while the rand depreciated by a disappointing 7.1% against the dollar for the quarter.

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 a promising 4.7% for the quarter. Both Kagiso and Old Mutual delivered good absolute returns, given the rally we’ve see in equities. Relative to Shariah industry peers, the Fund continues to perform well in the medium to long term. The Fund underperformed its composite benchmark in the quarter, but this benchmark has a very large skew to resource shares. Our managers tend to invest more broadly across different market sectors, which we believe is a better long-term construct.

The Kagiso Islamic Balanced Fund returned 4.8% for the quarter. The fund maintained its total equity exposure of around 60%, with 40% of the fund’s assets allocated to sukuks. A recovery in equity markets coupled with the fund’s resource holdings - in particular platinum exposure to Northam and Anglo American Platinum - contributed positively. Exposure to Tongaat Hulett was the single biggest detractor. Kagiso’s global exposure contributed positively to performance.

The Old Mutual Albaraka Balanced Fund performed in line with expectations. Total allocation to equities averages just less than 60%, with the residual invested in Shari’ah-compliant short term cash-type investments. The fund’s top local stock picks as identified by their low volatility multi-factor process includes Telkom, Anglo American Platinum and BHP Billiton. The fund’s 20% global equity allocation is very well diversified among approximately 80 global counters. These include Proctor & Gamble, PepsiCo, Chevron and Microsoft.

The BCI Shariah Equity Fund performed in line with expectations. Top stock picks included Anglo American, Microsoft, ADvTECH and Mondi Plc. Their large allocation to the educational group ADvTECH detracted from performance as ongoing concerns surrounding educational affordability weighed on margins and performance. While ADvTECH’s results were in line with expectations, the outlook for emigration - and semi-gration to areas such as Cape Town where ADvTECH has limited exposure - coupled with an inability to push sufficient fee increases have tempered short-term performance.

Portfolio positioning and outlook

SA 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 2.3% for the quarter, well ahead of the 1.2% average of ASISA MA High Equity peers. Since inception three and a half years ago, the Fund has returned 5.6% after fees, relative to general industry peers that have returned 4.2%. Relative to Shariah industry peers, the Fund continues to perform well. During this period of difficult local economic conditions, performance has been supported by the overweight position to resources and the high global equity exposure.

Last quarter we discussed our investment into the BCI Shariah Equity Fund, managed by Visio Capital. This concentrated equity portfolio has a balanced exposure to rand hedge shares such as Mondi Plc and Sasol, but also provides exposure to locally based shares such as AdvTech and Cashbuild. Visio believes many of these local shares are heavily undervalued given poor sentiment around the current economic conditions in SA and provide great bargain buys.

Kagiso’s Islamic Balanced Fund remains defensively positioned with an underweight allocation to domestic equities, in particular cyclical stocks. Their sukuk allocation is the largest single asset class exposure with a current yield of around 8%. They reduced their foreign exposure to less than 25% following significant currency depreciation. Kagiso remains convinced that their exposure to unique mid-cap stocks at very attractive valuations will deliver substantial outperformance over time.

The allocation of the Old Mutual Albaraka Balanced Fund to equities is approximately 60%, with the residual invested in Shari’ah-compliant short-term cash investments. Around 40% is invested in domestic equities and around 20% in offshore equities. Global exposure is around 25%, allowing the fund to achieve greater diversification and consequently a reduction in volatility, a primary objective of the fund.

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. Global positioning remains critical for diversification, while the underlying managers are well positioned in good quality local mid and small cap shares.

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.