2019/10/23 00:00:00

The tale of the tape for the third quarter of 2019: Local equities fell 5% and local bonds returned nearly 1%, while global equities and bonds were approximately flat and 1% higher respectively in US dollar terms, and the rand weakened by over 7% against the US dollar.
Various measures have pointed to a broad-based slowdown in global economic activity, which was compounded by a re-escalation in trade tensions between the US and China during the quarter. In addition, the state of the UK political environment remains one of confusion with no clarity on the likely outcome. In response to the muted growth outlook and increased uncertainty,several central banks, including the US Federal Reserve, have clearly stepped off the brake and are slowly reapplying the accelerator. Time will tell if this is sufficient to offset the uncertainty created by political developments. In the meantime, equity markets remained somewhat directionless, while industrial metals continued to come under pressure. Global bond yields moved lower again and precious metal prices rose as investors sought safe havens. Many sovereign bonds are once again trading on negative yields, while the US 10-year bond yield reached a low of 1.5% before unwinding a little towards the end of the quarter.
The South African economy has been and remains tied to the hip of the global economy. Hence the impact of slower global growth filtered through to South African markets and the currency. While a Chief Reorganisation Officer was finally appointed at Eskom during the quarter, visa restrictions were relaxed on several countries and President Ramaphosa announced his Economic Growth Advisory Council, progress on inducing a meaningful economic recovery has been slower than many expected. At the end of September, the President published his first weekly newsletter – over the coming months this may shed further light on the focus of Government. The South African Reserve Bank trimmed interest rates by 0.25% in the quarter as inflation remains well contained and growth anaemic.
The lacklustre returns across the various asset classes have resulted in another year of low returns for the fund, having delivered marginally above inflation over the last three and five years – well below its performance objective. Whileunderstandably difficult to digest, the silver lining for long-term investors is that we are seeing more attractive valuations on many assets. We would expect this to translate into a better outcome over the next five years.
In the short term, the continued slowdown in global growth and many unanswered questions around trade and Brexit are likely to weigh on markets. As such, the fund positioning remains underweight to risk assets. In the quarter, we further reduced global equity into strength and switched from global cyclical to global defensive assets within the local equity portion of the fund.
On the whole, local assets appear more appealing than their global counterparts, as many of the assets are more attractively valued and we believe South Africa is a self-help story in progress. Hence, we remain positively inclined to local bonds, the rand and selective industries within South African equities. An example of this selectivity is the construction sector. The sector has experienced massive consolidation since the peak in 2010, meaning that the survivors are well placed to benefit from any local economic improvement. WBHO is one such survivor that we hold on behalf of our clients – the company share price experienced a sharp move higher following the release of their results in the quarter.
While returns have been disappointing, we remain excited by the opportunities that regularly present themselves. We remain willing and able to take advantage of the opportunities.