The General lack of direction in the South African Equity market persisted through the second quarter of 2019. After the JSE Allshare index rose 4.2% in April it gave it all back in May, as the generally positively taken local election results were overshadowed by intensified tariff talks between the U.S and China.

June offered some relief leaving the index up just short of 4% for the quarter. Combining this with a decent first quarter, the year to date return stood at over 12% at quarter end, but in all fairness, this was off a low base and South African shares is yet to break out of the channel it has been stuck in for the last few years. It is not all doom and gloom though, as the consequences of this is the fact that there are loads of fairly priced assets up for sale, and thus the wrong time to lose nerve and lower exposure to growth assets.

We will need a catalyst to unlock the value, and timing when this will happen is unfortunately not so simple, but you do need to have the exposure when it happens. The global interconnected of assets do further complicate the problem, as the adage goes "when America Sneezes, Emerging Markets get a cold" our market often reacts on news that is not relevant, but herein lies further opportunities to be exploited.

The rise in Equites for the quarter was led by financials, returning 5.4%, whilst bonds (as measured by the Albi index) had a great quarter showing a gain of 3.7%. Listed Property retraced some of the excessive losses from a year ago posting a return of 4.5%. The Rand strengthened about 3% against the United States Dollar, this combined with a retracement in oil prices will bring some welcome relief to petrol prices, which positive for the consumer, and ultimately economic growth prospects.

There was no significant new developments in the world that will change the course of markets in our view, with global focus still being on trade talks (which recently has been escalated to include Europe) and the consequences of Brexit in the UK. In my opinion this will mostly cause volatility but is worth monitoring to exploit market timing opportunities. In the South African market, all eyes are still on Ramaphosa to get the Economy back on track, which will be a lengthy exercise, so we expect to see some ups and downs as markets are bound to react to short term noise as is human nature.

In General, we thus remain of the opinion that Investors will be rewarded for exposing their hard-earned money to capital markets. Even though the current market is testing their patience to its extremes, a well-diversified portfolio with an appropriate amount of growth assets is currently as prudent as ever, if not more so.

The first Quarter of 2019 offered some welcome relief following a very testing year, with equities globally showing significant returns in Rand terms. Not only did markets in general do well, our funds fared admirably compared to peers. The restructure of our funds is now more or less complete, and we believe the cost savings (even though not officially showing as a result of calculation methodology), optimisation and risk management incorporated, should continue to benefit our clients.

It was bit of a roller coaster ride towards the end of the quarter, when early in March SA growth asset gains seemed to reverse on the back of a Turkish lira sell-off, due to unfriendly government interventions in the foreign exchange market. This was dissipated by a late month recovery driven by dual listed shares in the Industrial and Resources sectors, as the rand weakened sharply against several currencies, the JSE All Share Equity Index ended the Quarter 8% up, just about wiping out all losses from the prior year.

The major driver behind volatility in local markets has been load shedding, which was at stage 4 prior to Moody’s credit rating announcement that was supposed to happen at the end of March, but never did. Global growth concerns also contributed to Rand Volatility, and an increased fuel levy combined with elevated oil prices resulting from supply cuts, will cause inflationary pressures and paints a bleak outlook for local economic growth.

However, bleak this might sound, at current valuations it mostly seems to be in the price, with upside potential outweighing the possibility of a major crash in growth asset markets. The national election later in the year is likely to drive markets going forward, barring any new news or shocks. Although calling the timing of a major correction is practically impossible, one needs to be exposed to part take, and thus stomaching some volatility should be well rewarded over time.

Global market movements followed a similar path as SA, initially weakening in March as the Fed hinted that the rate decision in December was a mistake, but subsequent dovish comments and positive developments in talks between the US and China which has come to be know as "Trade Wars", saw markets making a late month recovery.

Going forward, market moving news will likely still be dominated by Brexit uncertainty and the on again off again trade war talks. Contagion to other Emerging markets such as South Africa is unavoidable, so we can expect to continue seeing large market movements locally on the back of this. One would think an unfavourable outcome on Brexit is already priced into the UK markets, but it will undoubtedly show volatility at times of new developments regardless.

It was an emotional rollercoaster ride of ups and downs in the third quarter for investors, especially when looking at returns in Rand terms. At its weakest, the Rand traded at R15.41 to the US Dollar on close prices, and at its strongest at R13.11 in a massive band that is more than 17.5% wide. The JSE All Share Index experienced a similar ride, after having a relatively flat July it produced a decent 2.3% return for August, but September saw all of this (and then some) erased with a loss of 4.2%, leaving the South African Benchmark Equity Index down 3.8% year to date at the end of the Quarter. Even though some of the volatility can be attributed to local political issues, the bulk of it was contagion from issues in Turkey and negative implications for Emerging markets resulting from Trump’s trade wars, with global investors purely trading South African assets as a proxy given their favourable relative trade volumes and liquidity.

There have been quite a few changes in the Trèsor Funds of late, resulting from a change in the management of the funds, with the specific mandate to improve ASISA sector relative returns whilst bringing costs in the funds down. The fee reduction will take some time to reflect, as when referring to the TIC there are technicalities relating to calculation methodologies impacting the fee adversely through the seeding period, which carries through for the first three years. In reality, the all-in cost any current Investors is exposed to is quite a bit lower (as much as 1% lower in the Equity fund), with plans to reduce it significantly further over the months to come.

The forces likely to drive the markets in the medium term have not changed, being the effects of trade talks between the US and China on the Global side, and President Ramaphosa trying to balance the needs of the many with the cost of wiping out government inefficiencies and corruption, which will not happen overnight. We appreciate that the South African investment market has been difficult to navigate for years. The age-old philosophy of holding risk assets to provide returns has not paid off, leaving investors frustrated as one would have been better off in the likes of cash. It might feel like South Africa was unique in this context when comparing to global indices such as the MSCI All Country World Index, but the fact is that apart from the U.S., most other investment markets around the world have had the same experience.

This is hidden in the fact that the US has become such a big component of the global market that the numbers are somewhat distorted when viewed in unison.

From our perspective, this is the perfectly wrong time to change stance and reduce risk assets. Missing out on positive returns is every bit as hurtful as taking part in losses over the long run, and from a value perspective the situation has created plenty of opportunities.