Autus Priime Balanced comment - Mar 19
The Autus Investment Team customarily begins the year with a strategic investment workshop to consider the economic and inves tment factors likely to influence the markets in coming year. This year the mood was less sanguine because members identified several risks to keep an eye on in the coming mo nths. These include the dire state of the government finances and its ever-increasing debt exacerbated by the perilous state of the SOE’s - especially Eskom, credit downgrade potential, the looming national election and a slowing global economy amongst others.
During the quarter the national budget, read by Finance Minister Tito Mboweni, confirmed government’s desperation to raise additional revenue, cut rising expenditure and reduce financial demands from poorly functioning SOE’s. Eskom’s crisis deepened and the intermittent load-shedding is retarding national productivity and economic growth. SA GDP grew by 0.8% in 2018 and is forecast to grow by 1.5% in 2019. Goldman Sachs recently predicted that the electricity crisis could subtract 0.3% from Q1 GDP growth. The RMB/BER Business Confidence Index slumped to a low of 28 index points in the first quarter of 2019. Seven out of ten business people polled expressed dissatisfaction with the current business environment. Particularly concerning is that the declining confidence cuts across all sectors of the economy including the building, retail and manufacturing sectors. The consumer remains constrained and with rising petrol costs, hikes in electricity tariffs and a weaker rand, inflation may begi n to tick up. For February 2019, a consumer price inflation rate of 4.1% was recorded. This was comparatively benign mainly because food costs remained relatively constant. Inflation for 2019 is expected to remain within the 3- 6% SARB target range. With a frail local economy, slowing global growth and moderate inflation the SARB is not expected to raise interest rates in 2019. At their March review, Moody’s left their rating unchanged.
Internationally, global growth is beginning to slow. Interest rate hikes in the US are looking less likely this year as consumer spending weakens. Talks of a US recession are beginning to emerge. Interest rates in China were lowered during the quarter to support flagging growth there. The lack of consensus in the UK on an acceptable Brexit and the concomitant uncertainty is harming new investment and the prospect of growth in the UK. European economies are forecast to remain stable in 2019. The Brent crude oil price has risen by 27% to end the quarter at US$69.00. The global inflationary impact of these higher prices, if sustained, will be closely monitored. These factors combined with the ongoing trade negotiations between China and the US have fuelled investor jitters. We expect more of this jostling to occur in the markets until these major issues are resolved.
After a disappointing 2018 when 8 out of the 12 months delivered a negative return for the fund (-6,98% return for 2018), the fund gained 7,53% during the first quarter of 2019 outperforming the peer group median by 1,3%. With 210 funds listed in the Multi-Asset High Equity category the fund ended in the 1st quartile for the 3 months ended March 2019.
The performance could be mainly attributed to:
- the high exposure to offshore assets (the weakening of the rand caused this to grow to more than 32%); - the exposure to local and offshore equities of which 60% was offshore and 40% was invested on the local bourse.
The FTSE/JSE All Share Index ended the quarter 8,3% higher while the offshore holding of the fund (Autus Prime Global Equity Feeder Fund) gained 13,1% during the quarter. The top 5 holdings were mainly rand hedges i.e. Naspers, BHP Billiton, Anglo American, British American Tobacco (BTI) and Richemont. Offshore shares delivered excellent returns for the quarter and profit taking during the quarter resulted in the total offshore exposure declining to just under 30%. The equ ity portion of the fund is well diversified with 114 counters in total (including the offshore shares).
Exposure to the local retail sector was nullified but a small exposure to Dis-chem was added towards the end of the quarter. Opportunities to invest in the excellent performing resources sector was limited mainly to the big well diversified mining houses with a small exposure to African Rainbow Minerals and Exxaro added during the quarter. The property exposure was slightly increased towards the end of the quarter. Although the election in SA may cause some volatility, we are of the opinion that the expected result is already discounted in the market and the 40% local equity exposure will be maintained.
The Fund may invest up to a maximum of 20% of the net asset value of the portfolio in participatory interests of portfolios of collective investment schemes which are not managed by the same investment manager as the portfolio. May invest in any other forms of participation in portfolios of collective investment schemes or other similar collective investment schemes as the Act may allow from time to time, and which are consistent with the portfolio's investment policy.