MM Passive Preserver comment - Mar 18
Global: It was a rollercoaster introduction to 2018, witnessed by the return of volatility to global equity markets which shook leading stock markets into a mild correction in February. While global stocks remained bullish for a time on the back of healthy fundamentals, the crescendo of noise of a trade war between China and the US sent equity markets reeling towards the latter part of the quarter. By quarter-end, however, the noise had dialled down amid diplomatic murmurs from Washington which spurred the S&P 500 higher, while European and Asian equities followed suit. The party was, however, cut short as the contagion from the drubbing of Wall Street tech stock darlings (Facebook, Nvidia and Netflix) spread across the Atlantic, sending European and Asian stocks into remission.
Global bond yields rallied amid the equity sell-off and escalating trade war tensions, with the benchmark US 10-year Treasury yield falling below 2.8%. Over the quarter, and in US dollar terms, emerging market equities (MSCI Emerging Markets Index +1.4%) outperformed their developed market peers (MSCI World Index -1.3%), while global bonds (Barclays Aggregate Bond Index) closed the quarter at +1.4%. In terms of MSCI returns at a regional level, China (+1.8%), outperformed its European (-2.0%) and US (-0.8%) counterparts.
Commodities: Commodities were down (in US dollar terms) for most of the quarter with base metals (copper, aluminium and zinc) and bulk commodities (iron ore) deep in negative territory. Most precious metals were down over the period, though gold found favour in heightened trade war tensions between the US and China. Oil ended the first quarter in positive territory with Brent and WTI up 5.1% and 7.5% respectively.
South Africa: It has been a refreshing start to the year for South Africa with new leadership spurring renewed consumer and investor sentiment. As it has for the past decade, politics continued to dominate the headlines. Now Former President Jacob Zuma heeded his party's request and relinquished his position as Head of State with Cyril Ramaphosa assuming power mid-quarter.
The key and much-anticipated February budget speech was widely-received as fairly balanced, with the standout feature of the hike in value-added tax (VAT) an indication of a willingness by the new regime to take politically-difficult decisions in pursuit of fiscal prudence. The new cabinet appointments by Ramaphosa late in February were largely positive and welcomed by the broader public and business community, in particular the return of Nhlanhla Nene and Pravin Gordhan to oversee the maligned state finances and public enterprises, respectively.
In a huge sigh of relief, Moody's Investor Service retained South Africa's credit rating for both hard and local currency debt at their lowest investment grade rating of Baa3. The rating agency cited the improvement in domestic political risk following Ramaphosa's election as head of state and the subsequent changes made to his cabinet as key factors leading to their decision. Another major positive was the change in outlook from negative to stable, in addition to removing the 'review for downgrade' appended in November 2017.
Following on from Moody's, the South African Reserve Bank (SARB) provided further relief as it lowered the repo rate by 0.25% at its March Monetary Policy Committee (MPC) meeting. The MPC cited that domestic risks had dissipated and the risks to the inflation outlook have become 'more or less evenly balanced'. Headline inflation, as measured by CPI, printed lower-than-expected at 4% in February, down from 4.4% in January.
In terms of currency movement, the rand firmed 4.9% against the US dollar, 1.3% against the euro and 0.8% against the pound sterling for the first quarter. This was despite some concerns over the implications of the ANC's potential wider use of land expropriation without compensation.
Bonds (JSE ASSA All Bond Index (ALBI) was the star performer in the first quarter, up 8.06% amid a conducive macroeconomic backdrop as Moody's upgraded South Africa's outlook from negative to stable, with the benchmark 10-year government bond yield rallying 15 bps in March. Local equities could not escape the global downturn, with the FTSE/JSE All Share Index (ALSI) returning -5.97% for the quarter. The market was partly dragged down by the weakness in heavyweight Naspers (losing16.2% during the quarter and with a 15% weighting in the ALSI), but was also caused by a shocking -19.6% return from the listed property sector, as measured by the FTSE/JSE SA Listed Property Index (SAPY). This arose from persistent worries over alleged fraudulent practices at the Resilient group of four property companies, which drove share prices down by over 50% for the quarter. Financials produced -3.6%. Resources (-3.8%) and Industrials (-8.0%) also finished the quarter in red territory on the back of weaker commodity prices. Cash as measured by the Stefi Composite Index remained steady at 1.76% for the quarter.
At an equity sector level, it was an all-round negative quarter. Financials were encouraged by banks (Standard bank Group (11.8%), Nedbank (11.5%)) and diversified financials (Santam (24.4%)), however, listed property bucked the trend. Consumer services were the biggest detractor as index heavyweight Naspers retreated for three consecutive months. Basic materials were weighed down by weak commodity prices and while Murray & Roberts and Wilson Bayly Holmes-Ovcon (WBHO) delivered solid returns, Industrials failed to crossover into positive territory.
At a bond sector level, the 12+ year area was the best performing sector for the quarter delivering a return of 10.03% and the 1-3 year area was the worst performer returning 2.62% for the first quarter.
Asset allocation and portfolio positioning: During the quarter, the Funds' exposures to equities were positioned at the mid-higher end of the strategic asset allocation ranges. The Funds remain neutral local equities but overweight international equities. The Funds' exposures to cash were positioned at the lower-mid end of the strategic asset allocation ranges. Local bond holdings remained at the lower end of the strategic asset allocation ranges due to the low interest environment that we are currently facing. The property exposure was positioned at the mid-higher end of the strategic asset allocation ranges. The allocation to international equities remained unchanged during the quarter as global equity markets are offering more attractive value than local equities.
Fund and strategy selection: During the first quarter, no changes were made to the portfolios.
Despite very tough market conditions, the portfolio manager will maintain the Funds' spread across various asset classes, currencies and sectors. This will facilitate a more cautious investment approach as periods of market weakness are expected during the continued recovery of the global economy.
Absa Multi Managed Passive Preserver Fund: The Absa Multi Managed Passive Preserver Fund underperformed its benchmark for the first quarter. This was attributable to all of the underlying funds, with the exception of AAM Bond Fund and AAM Cash Fund.
Absa Multi Managed Passive Accumulation Fund: The Absa Multi Managed Passive Accumulation Fund underperformed its benchmark for the first quarter. This was attributable to all of the underlying funds, with the exception of AAM Bond Fund and AAM Cash Fund.
Absa Multi Managed Passive Growth Fund: The Absa Multi Managed Passive Growth Fund underperformed its benchmark for the first quarter. This was attributable to all of the underlying funds, with the exception of AAM Bond Fund and AAM Cash Fund.