2019/10/28 00:00:00

Market comments
In Quarter 3, the MSCI EMEA index (which includes South Africa) fell 7.02%, which was worse than the returns of that of the MSCI Emerging Markets (EM) at -4.25% and far behind the MSCI World’s 0.53%. Year to date, the picture does not change much with the MSCI EMEA at 5.13%, relative to the MSCI EM return of 5.89% and way behind the 17.61% for the MSCI World. The Federal Reserve and the European Central Bank both eased policies to offset signs of weaker global growth. The US economy has weakened but is not in a recession mainly due to fiscal support offsetting the adverse impact of the trade war. The inversion of the US yield curve is perceived as tolling the bell for a near-term global recession whilst Draghi also added to the call for fiscal easing.
Adding to that, commodity prices took a dive with key iron ore benchmark prices plunging some 20% in a matter of weeks and the key industrial metal, copper, hitting two-year lows. The key global manufacturing indices have also dived and are at fiveyear lows - but were at least stable over the last two months.
In the UK, Eurosceptic Boris Johnson has become the prime minister after being elected as leader of the Tories. There appears a greater likelihood of a no-deal Brexit or, at the very least, yet another postponement of the October decision deadline. The market has discounted this in large part with a weaker Sterling. As business decisions get postponed, the UK could dip into a technical recession.
In South Africa the SA Reserve Bank held the policy rate unchanged at 6.5% at its September meeting, but its statement was more dovish than in July when it did cut. For Quarter 2 of 2019, GDP was 3.1% quarter-on-quarter, above the consensus of 2.4% and reversing the first three months’ contraction. SA headline CPI accelerated from 4.0% in January to 4.5% in March and then settled around 4.3% in August 2019. Forward rate agreements are now pricing in a 25bp rate cut in the next six months.
From a SA asset allocation perspective, cash (STEFI: +1.8%) outperformed SA bonds (ALBI: +0.8%) and the FTSE/JSE All Share Index returned -4.2% (Capped SWIX: -5.1%) in the third quarter of 2019. In Dollars, the MSCI SA (-12.60%) continued to underperform the MSCI EM (-4.25%) mainly due to a weak Rand (- 6.9%). SA equities and SA bonds saw outflows of $5.7bn and $2.4bn respectively year-to-date. Properties, after stabilising somewhat over the first half of 2019, experienced a tough three months, losing about -4.4%.
On the corporate side the most important news was the Naspers spin-off of Prosus, which listed on 11 September 2019. Prosus is now the largest listed EU consumer internet company.
Portfolio performance, attribution and strategy
Globally, factor performance has continued the general trend for the year with Low Volatility and Momentum outperforming and Value underperforming up to the end of August. In September there was a significant rotation from Momentum, Quality and Low Volatility into Value, but this was short-lived and it does not seem like a structural shift in trends has occurred. It is interesting to note that historically there has been no structural relationship between Value and Low Volatility, but in 2019 these two factors behaved like polar opposites, which was especially true from May onward, where Low Volatility generated strongly positive returns and Value significantly negative returns.
Domestically, value signals like Price to Cash Flow and Price to Book have delivered strong performance over the past year, but the Dividend Yield and Earnings Yield factors continued to underperform in the third quarter. Momentum as measured by Price Momentum continued to outperform in the third quarter while the more defensive Earnings Revision signal marginally underperformed. Locally, quality signals of Profitability and Growth continued to underperform in 2019 after experiencing strong outperformance in 2018.
The Dividend Yield strategy of the fund underperformed the benchmark FTSE/JSE Shareholder Weighted All Share Index by 1.7% over the quarter and 2.3% over a 12 -month period. The sector effect played a significant role in the underperformance over the third quarter as the large overweight in resources counters underperformed and the large underweight in industrials counters lagged the benchmark SWIX.
In terms of stock selection, the largest contributions to outperformance over the quarter came from not holding Sasol (SOL) and from overweights in Pioneer Foods, Liberty Holdings, Woolworths and British American Tobacco. Detractors in relative performance came from overweights in African Rainbow Minerals, Kumba Iron Ore, Telkom and Truworths.
The fund was rebalanced in September and new additions included Motus, Massmart and JSE while South 32, Pioneer Foods and Woolworths were deleted. After the index rebalancing in September, the fund remains heavily overweight Resources relative to the FTSE/JSE Shareholder Weighted Index (SWIX) with equal underweights in Financials and Industrials respectively.