André is the co-head of Emerging Market Fixed Income at Investec Asset Management. He is responsible for South Africa fixed income. Prior to joining the firm in 1999, André was the deputy director general of the Department of Finance, where he took responsibility for macroeconomic, fiscal and tax policy and intergovernmental fiscal relations. Prior to that, André spent two years at the Development Bank of Southern Africa. This followed a distinguished academic career during which he published on fiscal and development issues. André holds a Master of Philosophy (Economics) degree from Cambridge University, a Master of Science (Mathematics) degree from Oxford University and a Bachelor’s degree from the University of Cape Town.
Sanlam Namibia All Namibian Fund - Sep 18
Investment returns continues on its lukewarm path with very little be excited about. Namibian investors having not only to content with a volatile market but also only local bonds and foreign equities, helped by the US market, having broadly outperformed inflation over the last 3 years. Positioning a portfolio in times like this is difficult when the local and world growth outlook looks under pressure, increasing interest rate environment and high volatility in market prices. Investors should be weary of trying to follow the returns, jumping from one investment/strategy to the next trying to find the short term returns and taking on more risk than they should.
We’ve not been spared by the global themes playing out as we see the continued US-China trade wars, interest rate normalization in the US, higher oil price and emerging market contagion originating mainly from Turkey and Argentina which had an effect on our currency, money and bond markets. Regionally South Africa has continued to disappoint on their growth numbers and with a second consecutive quarter growth below zero signaling a technical recession.
Namibia’s GDP numbers continue to disappoint and very little to be positive about after 2016, the second quarter of 2018 coming in at -0.2% recording the 9th quarter of negative growth in a row. The 2018 stats shows the sectors with biggest drop was Education and health with comments from NSA that the reason being is a decline in number of employees, one of the detrimental effects of government’s efforts in prioritising expenditure. With pressure on SACU revenue, moderating Chinese growth and very little wiggle room left in the Namibian budget it seems in the short run risks being skewed to the downside.
Inflation numbers continue on the upward walk from January low of 3.5% to 4.8% recorded in September, close to our initial projection from the beginning of the year. Although due to the drop in Namibian Dollar and rise in oil prices has resulted in a bit of a deterioration to the inflation outlook for the medium term.
Following South Africa the MPC of Bank of Namibia has not changed the repo rate which is still held at 6.75% and although the committee notes a deterioration of growth not only in Namibia but other key monitored economies, a positive growth outlook for the rest of the year and sufficient holdings of foreign reserves being the reason to keep rates where it is.
The medium-term budget policy statement to be delivered in October will be scrutinised for any support to a struggling economy, especially after a few recent sweeping changes to the tax regime which has seen Namibian Fiscus targeting dividend and trust income. Namibia has run successive budget deficits since the global financial crisis in 2009 to stimulate the economy, which has seen public debt swell to over 40% of GDP from less than 20% of GDP before 2011, leaving little room to continue rely on only borrowing to support the economy.
Most asset classes has had an unimpressive quarter as we saw the JSE ALSI pull back around -2.1% for the quarter and down -3.4% so far in 2018. The Resources and Financial sub-indices has at least bucked the negative trend seen in the broader market and has help the NSX Overall, which has a higher exposure to these type of companies, deliver a positive quarter 2.97% and up 3.81% for 2018. Post the Steinhoff debacle, market participants are increasingly jittery and it seems the level of over-reaction to negative news has become extreme and bringing quite a bit of volatility to the local market.
Although nothing much has happened on the local NSX index the last quarter, most of the listed companies’ which has June year ends results have been published. The banks, FirstRand Namibia and Capricorn Investment group, has shown a slight uptick in non-performing loans, FNB up to 1.7% from 1.4% in 2017 and CGP up to 3.3% from 2.2% in 2017. Something to keep an eye on as borrowers come under pressure but both banks delivering a respectable set of results in the current environment. Namibian Breweries profit flat from 2017 but some good developments in the South African Sedibeng brewery run with Heineken. Bidvest Namibia unfortunately not yet out of the shadow from their disappointing fishing division results and still trying to get out of the sector. One on the new tickers, Letshego Namibia, delivering a solid set of results after listing in 2017, but with the update in Microlending Bill some uncertainty around continuing ability to grow its loan book as aggressively.
Local bonds continue to be the one dependable asset class and looking at the IJG ALBI index delivered a return of 2.17% for the quarter and up 5.73% for 2018 and outperforming local cash, taking the IJG Money Market index as proxy, up 1.89% for the quarter and 5.83% for 2018.
Interest rates moved upward during the last quarter when the Namibian 10 year government yield took a short turn above 11% when it move from 10.83% at the end of June to high of 11.16% on 11 September back down to 10.89% at the end of the third quarter. Although still quite high compared to historic averages the interest rate spread over that of SA Bonds has started coming down after the sharp spike recorded in March 2017, spreads now hovering around the 1.65%, levels last seen early 2017 which is a positive move. On the shorter term the local 91 day TB issued by the Bank of Namibia spread has also narrowed over the SA counterpart where the quarter end yield was 7.59% compared to 7.12 in SA (7.92% and 7.07% respectively in June).
Local nominal bonds with prospective real yields above 5% are attractively priced and we continue to add bonds to our funds. At current yields it makes valuation sense to do so and increased the bond exposure with 2% during the quarter. Local equities have been increased on an effective level. Using a bottom-up, fundamentally-driven valuation analysis of the equity market, we believe this asset class to be currently trading at attractive valuation levels and offering reasonably good value and increased the equity exposure of the fund with 3% during the quarterand increased the equity exposure of the fund with 3% during the quarter.