GraySwan SCI* Cautious Fund of Funds - Dec 19
Capital Markets in 2019 were dominated by geopolitical risks, but the fourth quarter saw some of these risks fade, which in turn helped markets post gains. During the fourth quarter two significant political risks were avoided … for now. US tariffs on China were scheduled to increase on 15 December but a phase one trade deal avoided that outcome and provided a much-needed break for global- and especially emerging equity markets. The fact that the US also did not impose tariffs on European Union automotive exports also helped support equities. How long the trade peace will last is anyone’s guess but the market ended the quarter applauding the fact the worst-case scenario for trade had been avoided for now. Central banks provided the most significant driver of growth in global markets for 2019. The US Federal Reserve performed a 180 degree turn from four rate hikes in 2018 to cutting them three times in 2019 (one rate cut in the fourth quarter) and injecting about $60 billion of fresh money into financial markets every month. Although the bond buying programs were not labelled as QE, but rather as a technical fix in the repo markets, the flood of central bank liquidity lifted all boats, driving markets up sharply.
Fuelled by the Fed and a much-needed break in trade tensions the MSCI USA Index returned 9.1% over the quarter and 31.6% for the year in USD.
In Europe, Mario Draghi indicated the European Central Bank would resume its bondbuying programme before handing over the presidency for the European Central Bank to Christine Lagarde (former president of the IMF). Stocks were supported by slightly better than expected economic data from Germany as well as the phase one trade deal. The MSCI Europe Index returned 8.8% over the quarter and 23.8% for the year in USD. The positive European performance was driven by France and Germany. The MSCI France Index returned 8.5% over the quarter and 25.7% for the year in USD, while MSCI German Index returned 9.9% over the quarter and 20.8% for the year in USD. The Euro strengthened by 2.9% relative to the US Dollar in the final quarter of the 2019, but weakened by 3.9% over the course of the year.
In the UK, the former mayor of London achieved a life-long goal, after taking the top seat in the Conservative party and moving into Number 10 Downing street. Boris Johnson’s premiership capped a year of political turbulence: three Brexit deadlines missed, Theresa May’s premiership scuttled and a rare judicial intervention in parliament. Calling for a snap election paid off handsomely for Boris and the Tories, who achieved their largest electoral majority in three decades. Britain now faces a January 31st Brexit target with a premier determined to meet it. Andrew Baileys’ term as Bank of England governor starts in March 2020, as Mark Carneys’ term come to an end.
MSCI United Kingdom Index returned 10.0% over the quarter and 21.0% year-to-date in USD. The Sterling strengthened by 7.8% relative to the US Dollar in the final quarter of the 2019 and 3.9% over the course of the year.
Hong Kong has been rocked by Pro-democracy and anti-government protests. The unrest was provoked in June by a bill permitting suspects to be extradited to mainland China, but evolved into a serious political challenge for Chinese president Xi Jinping. While Hong Kong made global headlines, numerus other protests tested emerging market governments in Bolivia, Iraq, Lebanon and Chile as economic and political frustration reached boiling points. Despite the civil unrest in some emerging markets, equities posted strong gains in Q4, benefiting from an easing in geopolitical concerns. The MSCI Emerging Markets Index increased in value and outperformed the MSCI World Developed Market Index in the last quarter of the year.
The previous quarter MSCI Emerging Markets outperformed the MSCI World Developed Market Index was in Q1 2018. MSCI Asia ex Japan was the best performing Emerging Market region for the quarter as well as the year returning 12.6% over the quarter and 19.7% for the year in USD.
Russia was a standout Emerging Market performer, benefiting from crude oil price strength while oil producing nations announced further production cuts. The MSCI Russia Index returned 17.1% over the quarter and 52.7% for the year in USD.
Local markets were hampered by weak domestic economic conditions and Eskom concerns. The FTSE/JSE All-Share Index gained 3.3% for the quarter bringing it to 12.1% for 2019 in ZAR. Resources were the place to be in 2019, returning 13.8% for the quarter and 28.5% for the year driven by gold and platinum prices that were up 18.3% and 21.5% for the year in ZAR. The top three performing listed companies for 2019 were all from the resources sector i.e. Implats 27.5%, Gold Fields 24.6% and Sibanye 24.3%
On the other side of the scale was the financial sector, the worst place to be, only returning 2.5% for the quarter to end the year in the green with 0.63%.
The 10-year SA government bond yield rallied 26 basis points in 2019. The All Bond Index (ALBI) returned 10.3% while the Government Inflation-linked Bond Index (ILB) edged up only 2.3%. Meanwhile, the FTSE/JSE SA Listed Property Index managed to end the year in the green, up by 1.9%.
To navigate prolonged political uncertainty amid a late economic cycle will be challenging in 2020. We continue to believe that a well-diversified portfolio will be best equipped to navigate both the economic and political uncertainties in 2020.
The portfolio will consist of a mix of collective investment scheme portfolios investing in equity, bond and property markets and money market instruments. The portfolio shall adhere to the multi asset: medium equity classification requirements as set out by the Asisa standard: fund classification for South African regulated collective investment scheme portfolios. Investments to be included in the portfolios will, apart from assets in liquid form, consist solely of participatory interests in portfolios of collective investment schemes registered in the Republic of South Africa or of participatory interest in collective investment schemes or other similar schemes operated in territories with a regulatory environment which is to the satisfaction of the manager and trustee of a sufficient standard to provide investor protection at least equivalent to that in South Africa.
The Manager shall be permitted to invest on behalf of the three portfolios in offshore investments as legislation permits.
The portfolios will also be allowed to invest in listed and unlisted financial instruments (derivatives) as allowed by the Act from time to time.