2018/12/13 00:00:00

Macro review
In the US, economic growth remained robust, and this ultimately overshadowed simmering concerns around the escalating US-China trade war. Stability in growth and employment figures allowed the Federal Reserve (Fed) to enact its widely anticipated increase in the federal funds rate by 25 basis points. The committee dropped its long-standing description of monetary policy as “accommodative” and reaffirmed its outlook for further gradual hikes into 2019. Data released in September showed wages to be growing at the fastest rate since 2009, while additions to non-farm payrolls remain above 185 000 on a three-month average. As yet, industrial activity indicators show little impact from the trade wars.
In Europe, worries over trade wars and potential US tariffs on cars were a feature of the period. On the economic front, growth for the second quarter of 2018 was revised up to 0.4% quarter-on-quarter, compared to the initial estimate of 0.3%. Forward-looking activity indicators continued to point towards expansion, albeit at a more subdued pace than at the start of 2018. The flash eurozone composite purchasing managers’ index1 for September fell to a four-month low of 54.2. Eurozone inflation was estimated at 2.1% for September, up from 2.0% in August. There was no change in policy from the European Central Bank, which reiterated that interest rates would remain on hold “at least through the summer of 2019”.
In emerging markets (EM), there was little progress in bilateral trade negotiations and China responded with tariffs on $110 billion of US goods. Meanwhile, Chinese macroeconomic data disappointed. Turkey experience a sharp sell-off in the Lira, as geopolitical tensions with the US exacerbated ongoing concerns over its wide current account deficit, above-target inflation and central bank independence. South Africa’s macro backdrop deteriorated as global liquidity tightened given the economy’s twin deficits, and second-quarter GDP growth disappointed, slowing to 0.4% year-on-year. Mexico saw positive general elections and an agreement with the US on NAFTA renegotiation. Despite ongoing risk of new US sanctions, Russian benefitted from crude oil price strength.
Global and local market review
The MSCI World posted a dollar total return of 5.1% (1.9% for the second quarter of 2018), once again outperforming MSCI EM (-0.9% in the third quarter vs -7.9% in the second quarter). In the US, despite political uncertainty and trade concerns, the US equity bull market became the longest in history on 22 August, and advanced in the third quarter to significantly outperform other major regions. Over the quarter, the information technology and healthcare sectors were boosted by a slew of robust earnings. Eurozone equities posted a modest gain in the third quarter with the MSCI EMU index returning 0.4%. Energy and industrials stocks were among the leading gainers. The FTSE/JSE All Share Index fell 0.8% amid Brexit uncertainty and a tempering of the global growth outlook, as a result of the escalating trade war between the US and China. Although trade tensions continued to escalate during the quarter, the Japanese stock market ended September above its recent range to show a total return of 5.9% for the quarter.
EM equities lost value in what was a volatile third quarter, with US Dollar strength and the US China trade dispute weighing on risk appetite. China underperformed as the US implemented tariffs on a total of $250 billion of Chinese goods, some of which are set to increase in January, and threatened tariffs on a further $267 billion. of goods. There was little progress in bilateral trade negotiations and China responded with tariffs on $110 billion of US goods. Turkey was the weakest index market amid a sharp sell-off in the Lira. South Africa also underperformed. The market is vulnerable to global liquidity tightening given the economy’s twin deficits, and second-quarter GDP growth disappointed, slowing to 0.4% year-on-year. SA Resources and SA Financials outperformed in the third quarter with total returns of 5.2% and 2.8% respectively, while the SA Industrials sector was the drag on the index, shedding 7.8% over the same period.
Portfolio performance, attribution and strategy
Global trade uncertainties and other geo-political risks once again weighed heavily on investor minds over the prior quarter. This resulted in rotation between Momentum/Growth and Value during the quarter as the slope of yield curve gyrated. The yield curve slope remains is the key driver for Value performance, which was the best performing factor based on MSCI World Index in September.
Domestically, Value has strung together two strong quarters after a poor last quarter of 2017 and first quarter of 2018. Deep value factors such as Price to Book and Price to Earnings seemed to rekindle its 2016 performance where cyclical value was favoured. To some extent the unwinding of Momentum has benefitted these cyclical value measures in the short term, but should macro uncertainty continue and deepen, we may see a shift toward more defensive Value or Quality strategies. Dividend Yield (a strategy which focuses on high dividend paying stocks) in particular experienced a corker of a quarter, as the environment was primed for stocks that provided a more defensive type of Value.
Top contributors to performance predominantly once again originated within the Resource sectors, where the fund held overweight positions in African Rainbow Minerals (ARI), Exxaro (EXX), South32 (S32) and Kumba Iron Ore (KIO). Despite this sector impact, the largest drawdowns were generated by not holding Rand sensitive stocks such as Sasol (SOL) and Old Mutual (OMU), as well as overweights in more domestic orientated companies such as Coronation Fund Managers (CML), Woolworths (WHL) and Imperial (IPL). In contrast to the second quarter, where not holding Naspers (NPN) severely detracted from relative performance, during the third quarter this positioning contributed around half of the positive excess returns. This stock-specific risk has been significant, as any relative performance in Naspers has a meaningful impact on the portfolio regardless of the Yield characteristic.
In terms of constituent changes during the September rebalance, there was one addition and one deletion for the Divi+ index. The addition was Tiger Brands (TBS) whereas the deletion was MMI.