Sanlam Select Managed comment - Sep 19
The monetary stance of the US Federal Reserve (Fed) remained in focus in September. At its meeting, the 10-member Federal Open Market Committee cut interest rates by 25 basis points (bps), largely in line with expectations. However, this move does not reveal the full story. Amid continued uncertainty due to the unpredictability of the US–China trade war and confusion over the likely path of US inflation, three of the 10 members voted against the majority decision to cut rates by 25 bps. This was the largest number of dissenters on a policy decision in nearly five years. Two dissenters voted to keep rates unchanged, and one member voted for a 50-bps cut. The level of dissension reflects widespread market uncertainty about what to expect from the US and indeed the global economy. While US inflation and growth appear relatively benign for now (and growth is slowing), the labour market has remained tight and points to growing inflationary risks ahead. Markets have thus had to adjust back to a wait-and-see monetary stance, pushing bond yields down again, and suppressing risk appetite in currencies (the US Dollar strengthened further). Despite this uncertainty, the easing monetary backdrop allowed equities to close the month at higher levels.
The Fed was also forced to inject up to $70 billion of overnight liquidity into the US banking system during the month, as banks’ access to cash dried up. This somewhat concerning development has arisen from the Fed shrinking its balance sheet over time (withdrawing quantitative easing) while investors push funds into corporate credit to seek higher-yielding assets. As a result, banks have struggled to obtain overnight cash, and these rates spiked in mid-September. Although this is not a critical situation if only temporary, it should give investors pause as to the implications of continued withdrawal of quantitative easing and the unwinding of the Fed’s balance sheet over time.
Elsewhere, European data and politics (especially Brexit) continued to feed bearish sentiment. A significant $10/bl spike in oil prices during September created a bout of risk aversion (as well as negatively impacting SA’s terms of trade and prompting a sharp move weaker in the Rand) as attacks disrupted half of Saudi crude oil production, or nearly 6% of global supply. The spike was initially quite alarming with concerns around the impact of an oil price shock on an already fragile global economy, together with fears of rapidly escalating geopolitical tensions in the Middle East. A quick recovery in Saudi oil production to pre-attack levels and rising US inventories have, however, seen Brent crude prices sink back to $58/bl – even below pre-attack levels.
In South Africa, the South African Reserve Bank (SARB) kept interest rates unchanged in a unanimous decision, taking a cautious stance ahead of key risk events before the next Monetary Policy Committee (MPC) meeting in November that could negatively impact the Rand and, in turn, the inflation outlook. The MPC reduced their growth forecasts for 2020 and 2021 citing near-term growth risks to be balanced, but remaining concerned over medium-term prospects. The statement reiterated that the implementation of structural reforms to lift potential growth remains urgent. The release by National Treasury of an economic recovery plan for public comment at the end of August was a welcome event, laying out practical and pragmatic economic policy proposals to lift economic growth in an inclusive manner. The plan was met with mixed reviews, with the ANC’s alliance partners heavily criticising the plan, particularly relating to aspects such as labour market reform and privatisation of state-owned entities (SOEs). Importantly, the late September meeting of the ANC’s national executive committee (NEC) saw an endorsement of the less contested aspects of the plan, which could enable Finance Minister Tito Mboweni to include more detail in the Medium-Term Budget Policy Statement (MTBPS) scheduled for 30 October. The presence of both Mboweni and the NEC’s head of economic transformation,Enoch Godongwana, at the post-NEC media briefing were also notable inclusions.
Asset class performance:
Against this backdrop, SA equities ended the month largely flat, boosted by good returns in the Financial Index (+3.5%), while Industrials (-0.7%) and Resources (-1.1%) lost value in the month. Interest rate-sensitive shares were among the better performing shares, with resources stocks such as AngloGold, Gold Fields and Sappi being hardest hit. The Tantalum suite of funds all delivered positive performance. The funds benefited from holdings in Wilson Bayly Holmes, British American Tobacco, Anglo American and Foschini, while Sasol, AngloGold, Sappi and MTN detracted from returns in the month.
Bonds gained 0.5% for the month with inflation-linked bonds turning positive, with a return of 0.4%. The SA bond market is in somewhat of a holding pattern ahead of key events in the coming weeks, with the detail of the announcements, as well as market reaction to such, highly uncertain. The MTBPS will be delivered against a deeply challenging backdrop of growth and revenue shortfalls, exacerbated by the additional material support that has been required for SOEs. The market is already bracing itself for a significantly deteriorated outlook (with the fiscal deficit widely expected to be at 6%, or worse, relative to 4.5% anticipated at the February budget). Whilst a large revenue shortfall has been well flagged, the degree of potential fiscal consolidation from potential other levers is unclear. Similar timing is expected for the long-anticipated Eskom restructuring paper, which should address both financial and operational restructuring plans. The MTBPS is also expected to contain more detail of implementation plans for the Treasury Economic Policy paper, which should add credibility to any upward growth revisions that may be pencilled into Treasury forecasts. Early November will then see the Moody’s rating decision, with many market commentators anticipating a downgrade to a negative outlook, whilst still retaining an investment-grade rating. We remain cautious in our bond positioning prior to these events, having reduced duration into the mid-year rally in yields, and implementing option protection. Remaining duration positioning consists of a combination of exposure to the shorter end of the curve (in cash and yield-enhancing investments such as negotiable certificates of deposit and corporate paper), with some exposure to the longer end of the bond curve where we feel yields are most attractive and currently reflect an attractive risk premium (at yields above 9.50%)
The fund invests in a combination of equities, money market instruments; nominal and inflation linked bonds and listed property as well as international equities and fixed interest investments. The Fund manager employs an active asset allocation and securities selection strategy and has a maximum equity holding of 75%. Fund risk will be lower than that of an equity Fund. The investment manager will also be allowed to invest in financial instruments (derivatives) as allowed by the Act from time to time in order to achieve its investment objective.