2019/01/04 00:00:00

The volatility within key economic variables continued into the third quarter due to South Africa entering into a technical recession, collapse of the Turkish lira and an amplification of the trade war between the US and China. For example, the Rand-Dollar exchange rate fluctuated from R13.72 to a peak of R15.42 and reverted back to R14.14. The result was a significant increase in market volatility and nervousness amongst local and foreign investors. Amidst such an environment, we observe initial signs of the market reverting back to the certainty offered by quality companies – specifically, in cases where strong results were reported. Examples include Discovery, FirstRand and BidCorp. However, these positive contributions (relative to benchmark) were eroded by the Basic Materials sector which continues to rally on the back of restructuring, currency movements and commodity prices. We maintain a structural underweight position to the sector based on our belief that it is not able create shareholder value consistently over long periods. Even though the sector can rise substantially in the short term, forecasting the factors that drive these movements is essentially a “mug’s game” that is hard to repeat consistently. We continue to maintain our discipline of investing only in companies that offer the best potential for long term wealth creation despite the environment disproportionately favouring such cyclical sectors. Our focus remains on protecting our client’s wealth (instead of reaching for risk) during periods of heightened volatility. As an example, we exited from our holding in MTN post an escalation in regulatory risk in Nigeria with the Central Bank accusing MTN of illegally repatriating USD 8.1b in historical dividends.