Satrix Low Equity Balanced Index Fund - Dec 18
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 eaccommodativef 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, Q2 2018 growth was revised up to 0.4% quarteron- 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 PMI Composite Output Index (1) for September fell to a four-month low of 54.2. Eurozone inflation was estimated at 2.1% for September, up from 2% in August. There was no change in policy from the European Central Bank who reiterated that interest rates would remain on hold eat least through the summer of 2019.
In emerging markets, 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 Africafs macro backdrop deteriorated as global liquidity tightened given the economyfs twin deficits, and Q2 2018 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, Russia benefited from crude oil price strength.
Global and local market review
The MSCI World Index posted a Dollar total return of 5.1% (+1.9% for Q2 2018), once again outperforming the MSCI Emerging Markets Index (-0.9% in Q3 2018 vs - 7.9% in Q2 2018). 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 Q3 2018 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 Q3 2018 with the the MSCI EMU (European Economic and Monetary Union) Index returning 0.4%. Energy and industrial 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.
Emerging market equities lost value in what was a volatile Q3 2018, 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 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 Q2 2018 GDP growth disappointed, slowing to 0.4% year-on-year. SA Resources and SA Financials outperformed in Q3 2018 with total returns of 5.2% and 2.8% respectively, while the SA Industrial sector was the drag on the index, shedding 7.8% over the same period.
The FTSE/JSE Capped Shareholder Weighted All Share Index (Capped SWIX) delivered a return of -1.65%, which was better than that of the FTSE/JSE Shareholder Weighted Index (SWIX), which realised -3.34%. The return difference could mainly be attributed to the weight difference in Naspers and to a lesser extent to Aspen and MTN.
Core government bond yields rose over the quarter due to positive economic data, particularly from the US. This outweighed a bout of safe-haven demand in August caused by concerns related to emerging market instability, trade tensions and political issues in Europe. The Fed implemented its third rate hike this year, removing references to ‘accommodative’ policy and striking an optimistic tone. In commodities, the S&P GSCI Spot Index posted a marginally negative return in Q3 2018 with US Dollar strength weighing on prices. Industrial metals were weaker on global trade uncertainty. Copper was down 5.5%, while nickel (-15.6%) and lead (- 15.9%) registered steeper declines. Precious metals were also weaker, with silver and gold down 8.9% and 4.8% respectively. By contrast, the energy segment posted a positive return as spot prices for Brent crude gained 5.5% and natural gas was up 2.9%.
South Africa remains on a low-growth path. The aftershocks of State Capture and policy uncertainty persist, constraining confidence and investment. Structural economic reforms remain slow in coming, though the finalisation of the Mining Charter before the end of the year marks an important milestone. South Africa needs growth in order to arrest further fiscal, socio-economic and credit ratings decline.
Moody’s review of the sovereign’s ratings around middle October is unlikely to deliver any surprises (no change to its stable outlook or its Baa3 rating), though we think there is a chance the review could be delayed until after the 24 October medium-term budget. Although local factors have weighed on the Rand, i.e. Ramaphoria sentiment souring, risks of a Moody’s downgrade, uncertainty surrounding the Mining Charter and land expropriation without compensation, much of the weakness in the Rand has been driven by external developments - a stronger US Dollar, weaker commodity prices, tighter monetary policy from the Fed, contracting global Dollar liquidity and lately, emerging market contagion risks from Turkey and Argentina.
The manager shall seek to achieve the objective by investing in a combination of equities, bonds, inflation linked bonds, assets in liquid form from (including money market instruments), listed property and international equities, fixed interest and listed property.
The investment manager will also be allowed to invest in derivatives as allowed by the Act from time to time in order to achieve its objective, as well as in participatory interests in collective investment schemes registered in the Republic of South Africa or of participatory interests in collective investment schemes or other similar schemes operated in territories with a regulatory environment whic is to the satisfaction of the manager and the trustee of a sufficient standard to provide for investor protection which is at least equivalent to that in South Africa. This combination of investments will enable the investment manager to track the performance of the Satrix Low Equity Balanced Index as closely as possible. When nivesting in derivatives, the manager will adhere to prevailing derivative regualtions.
The trustee shall ensure that the investment policy set out in the preceding clauses are adhered to, provided that nothing contained in this clauses shall preclude the Manager from varying the proportions of securities in terms of changing economic factors or market conditions or from retaining cash in the portfolio and/or placing cash on deposit.