Matrix NCIS Stable Income Fund - Dec 19
In sharp contrast to the conclusion of 2018, 2019 ended on a strong note with equity markets surging, EM spreads compressing, and EM FX rebounding. Yield curve inversion, moderating earnings momentum, trade wars, global manufacturing slowdown, and stronger US dollar should have been a toxic mix for equity markets. Yet, the Fed’s dovish pivot and renewed QE was enough to save the year – who said central banking is boring!
The challenge from here is that valuations require strong earnings growth at a time when geopolitical concerns are intensifying, the oil price is higher, and populism is percolating. Moreover, improving growth, tightening labour markets, and de-globalisation could lead to long overdue inflationary pressures. This would be a headwind not only to bonds, but also to equities via the threat of central banks turning hawkish again.
A more challenging global backdrop in 2020 would exacerbate domestic hurdles, which currently seem insurmountable. The fiscus is a mess, Stage 6 load shedding remains a threat, and policy uncertainty continues in the form of the Expropriation Bill, the Section 25 amendment, and the NHI Bill. Limited reforms and stagnation could lead to rating downgrades and attendant capital outflows. Given these prospects, the SARB surely wishes that monetary policy were a little more boring. With the MPC short on doves and long on hawks, notably weaker growth, sustained low inflation, and falling inflation expectations will be required to pull the SARB over the line on rate cuts. In the meantime, the focus falls on Eskom, Minister Mboweni’s February Budget, and Moody’s review.
During December, property (-2.1%) was the only asset class to underperform cash (0.6%). Equities (3.3%) were in the lead, followed by bonds (1.9%), fixed-rate credit (1.7%), inflation-linked bonds (1.0%), and floating-rate credit (0.8%). Equities (4.6%) also took pole position for 4Q19, followed by fixed-rate credit (3.0%), and floating-rate credit (2.9%). Bonds (1.7%) performed in line with cash (1.7%), but property (0.6%) and inflation-linked bonds (-0.9%) underperformed.
The US dollar lost 3% in 4Q19 as risk appetite improved due to easier monetary policy, strengthening EM data, and the pending “phase one” US/China trade deal. The rand was the best performer within the EM FX majors for Q4, appreciating by 8.6%. USD/ZAR dipped below 14.00 on the last day of 2019, but has since risen to 14.30, which is marginally overvalued compared to our 14.50 – 15.00 fair-value range.
DM bond yields were flat to moderately higher during 4Q19 as easier monetary policy supported risk assets and real activity indicators suggested a stabilisation in growth momentum. The 20bp rally in SA yields in December was not enough to offset the impact of the MTBPS, leaving yields unchanged for the quarter. While the 5-year CDS compressed by 40bp, the local 10-year yield still reflects fiscal risk – at 9.00% it is at the upper end of our 8.60% - 9.10% fair-value range.
Portfolio performance and positioning
The fund gained 1.9% in 4Q19, outperforming the benchmark. Bank paper and NCDs accounted for the bulk of the quarter’s performance, while our allocation to fixed-rate government bonds was also accretive. The fund remains invested in NCDs and high-quality senior bank paper. Following the sell-off in government bonds in the wake of the MTBPS, we increased our allocation to government paper, raising our duration stance to 1.7 years. Given the rally in the rates market we have pared our duration stance to 1.4 years.
The fund is a multi-asset income portfolio. The objective of the portfolio is to maximise income and deliver stable absolute returns that exceed the Benchmark measured over rolling 12-month periods. The portfolio must comply with the applicable exposure limits contained in Regulation 28 of the Pension Fund Act and Board Notice 90 to the Collective Investment Schemes Control Act (BN90). The portfolio many invest in a spectrum of primarily South African investments, which may include interest-bearing instruments, government and corporate bonds, other non-equity securities, equity securities, preference shares, property shares and property related securities listed on exchanges, money market instruments and other assets in liquid form (as defined in BN90).