2019/05/29 00:00:00

The local equity market enjoyed a fourth consecutive month of positive returns in March 2019 after a particularly weak 2018, which saw the local bourse decline by 8.5%. During the first quarter of 2019 the JSE All Share Index gained +7.9% driven by a strong rally in SA Resources (+17.8%) and a rebound in SA Industrials (+7.4%). The large cap index returned +8.5% during the quarter while the small and mid-cap indices continued to underperform returning respectively -3.4% and 2.8%. Despite improving local returns, South African equities underperformed global emerging and developed markets by respectively 5.4% and 8.2% in USD terms. While global equity and credit markets enjoyed a strong rally in 2019 on the back of improved sentiment around US/China trade relations and a more dovish US Federal Reserve, South African specific issues weighed heavily on local returns. In this regard, Moody’s latest update notes that if continued low GDP growth rates persist during the medium-term and elevated debt levels are not curbed the sovereign would likely be downgraded to Junk status.
The Northstar SCI Managed Fund performed in line with its benchmark, the ASISA South Africa MA High Equity Peer average, retuning 5.8% during the quarter.
The fund’s local equity component performed well during the quarter despite a significant underweight position to SA resources. The fund benefitted from a strong performance in core positions such as British American Tobacco (Q1 2019: +30%), Anheuser-Busch (+27%), Reinet Investments (+13%) and an overall underweight position to SA retailers, who continued to experience losses as the state of the SA consumer has not seemed to show improvement. Whilst we admit local equity valuations are looking more supportive, particularly in the industrial space, we remain cautious as a result of an overall weak fundamental outlook for the sector. The fund continues to be overweight a number of stocks in the consumer goods and financial sectors, which we expect to outperform over the medium term.
The offshore equity component of the fund continued to perform well significantly outperforming the MSCI World Index on a gross basis due to strong hit rates (69%) and a win-loss ratio during the month in excess of 270%. The fund benefitted from the contribution of several stocks, of which worth noting are Danaher Corp (+28%), Moody’s (+29%), LVMH (+25%) and Philip Morris (+34%).
The fund’s fixed income component positively contributed to performance as a result of maintaining high average duration during quarter. Under current conditions, we estimate the front-end of the curve to be expensive (R208 & R2023) and longer dated bonds (R186, R2030, R213) to be undervalued, with a fair-value 1 year exit yield of 8.3% for the R186. The interest rate outlook is positive for fixed bonds, with inflation forecasts moderating more than expected and developed markets (lead by the US) taking on a dovish tone and indicating a neutral stance on the future direction of interest rates.
The inflation-linked bond weighting in the fund has been gradually increased over the past 12 months, with a bias for shorter dated maturities on real yields above 3%. Although 3% real yields are very attractive on an outright basis, their prospective nominal returns look muted relative to the returns from fixed bonds with the same maturity.
Up until recently, valuations on listed property stocks have looked unfavourable, given the deteriorating economic environment, weak consumer, declining business confidence, electricity disruptions, rising vacancies and over-supply. The result for companies, has been weaker top-line growth and reduced profitability as costs have increased and balance sheets leveraged in order to explore offshore growth opportunities. Despite this backdrop, valuations are looking more supportive, especially if economic conditions stabilise and improve.
The fund is currently well diversified, conservatively positioned and invested in high quality assets that we expected to perform well through the cycle.