2019/10/28 00:00:00

Market comments
In the third quarter of 2019, the MSCI Emerging Markets (EM) EMEA Index (Europe, Middle East and Africa, including South Africa) fell 7.02%, which was a worse performance than that of the MSCI EM Index, which posted a negative return of 4.25%, and far behind the MSCI World Index’s return of 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 US Federal Reserve and the European Central Bank (ECB) 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 nearterm global recession whilst ECB President Mario 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 was 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 their statement was more dovish than in July when it did cut. For the second quarter, 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% in January to 4.5% in March and then settled around 4.3% in August 2019. Forward rate agreements are now pricing in a 25-basis point rate cut in the next six months.
From an SA asset allocation perspective, cash (STeFI +1.8%) outperformed SA Bonds (ALBI +0.8%) and the FTSE/JSE All Share Index returned a negative 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 $5.7 billion and $2.4 billion respectively year to date. Property, 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 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, Quality continues to experience profit-taking as profitability factors such as Return on Equity continue to underperform over the quarter, while Debt to Equity marginally offset the underperformance. Investors have been favouring more cyclical mining stocks, which are growing its margins off a low base, instead of more stable high-margin local companies. The tough local economic sentiment has contributed negatively to the Rand over the quarter, which had an impact on the relative performance of the fund over the quarter.
In terms of stock selection, the largest contributions to outperformance over the quarter came from overweight positions in Woolworths, Clicks and Anglo Platinum, while underweight positions in Sasol and Shoprite also added value. Detractors in relative performance came from overweight positions in Mr Price, Truworths, Kumba Iron Ore and Assore, as well as an underweight position in British American Tobacco.
There were no additions and deletions as the index only rebalances in June and December each year. Having said that, Naspers listed its internet assets in Amsterdam via Prosus (PRX), which the fund holds as a result of the corporate action.
The index and portfolio remain focused in its extraction of Quality and should markets give way to further risk aversion, the defensive character of the basket should prove rewarding while not meaningfully compromising returns during up markets.