2019/01/02 00:00:00

Market overview
The global trade war between the United States and China continued to dominate headlines during the quarter. The US intensified tariffs on Chinese goods and China retaliated. Despite the tussle between the two economic giants, the US economy remains strong. This is visible in the rally of the US dollar and their robust labour market. These positive developments gave the Fed room to hike interest rates in September from 2.0% to 2.3%.
Unfortunately, the higher developed market (DM) interest rates and stronger US dollar do not bode well for emerging market (EM) assets such as South Africa, and most EM countries saw their currencies weaken. SA fared worse than its EM peers as signs of poor economic growth surfaced during the quarter, resulting in SA moving into a technical recession.
SA equities lost 1.6% over the quarter, driven largely by poor returns from industrials. SA property lost 1.0%, while SA bonds returned 0.8%. The weaker rand supported offshore returns, leading to a 7.4% total return from global equities.
Portfolio review
The Fund returned 1.5% for the quarter, marginally ahead of the average of ASISA MA Medium Equity peers. The Fund is comfortably ahead of peers over the 12 month and three year periods. The Fund’s overweight position to resources and rand hedge shares continued to support peer relative performance.
Coronation’s domestic balanced mandate has a rand hedge bias, with a moderately high allocation to equities and property. One of their largest positions, MTN, detracted from performance.
Investec believes that investors were too optimistic about President Ramaphosa’s ability to turn the economy around in the short term and that more rational expectations have since taken root. Locally, they view SA government bonds as the best opportunity. Yielding more than 9%, these instruments offer higher risk-adjusted return potential than the retail, banking and property sectors. Their bond exposure remains prudent – lower duration, higher quality instruments, with exposure balanced against offshore holdings to limit the potential for loss. Investec maintains a high global equity allocation positioned around 30% or more.
Prescient’s domestic defensive mandate performed relatively well for the quarter, returning 1.3%. The low equity allocation coupled with short duration fixed interest instruments supported performance.
Prudential prefers resources through counters such as Sasol and Anglo American, but also sees value in financials such as Standard Bank and Old Mutual Ltd. Long duration bonds remain a key investment for Prudential.
Portfolio positioning and outlook
The largest themes in the Fund are overweight resources and rand hedge shares, which has benefited performance over the past year. The global positioning tactically remains relatively high between 25% and 30%.
In addition to further rate hikes in the US, we expect trade wars to continue dominating headlines and this could weigh heavily on EM sentiment. Local asset prices have retreated to levels that may provide a good entry points for investors. However, the global and SA environment remains highly uncertain and we continue to emphasize the importance of having a long-term focus when making investment decisions.