Sanlam Select Managed coment - Sept 18
As referred to in previous commentaries, the fragile macro backdrop continues to unsettle global markets and test the confidence level of investors. The US-China trade war again dominated headlines in September, but things quietened down into month-end as negotiations between the two nations stalled ahead of the US midterm elections in November. Nevertheless, strong US economic data (as expected) provided the backdrop for the US Federal Reserve to increase interest rates by a further 0.25%. This move had little effect on markets and seemed largely priced in, but the US yield curve continues to be a focus area for investors. In emerging markets, the debt crises faced by Turkey and Argentina in August stabilised somewhat. Turkey succumbed to pressure and raised interest rates by 6.5%, thus supporting the Lira, while Argentina managed to negotiate a new finance deal with the IMF. A key narrative affecting many economies is the continued strength in the oil price. New supply is taking time to come on stream and replace lost volumes from Iran, Libya and Venezuela. Opec is still disciplined and seems to be enjoying its price windfall for now. The forward pricing of oil continues in a backwardation market (one where the forward price of a contract is below the expected future spot price), and we expect that spot prices will subside somewhat, but this will take some time.
On the domestic front, the SA economic picture has deteriorated again. The high oil price and weaker Rand have added pressure to a beleaguered consumer, just as some political optimism has returned to the country. A second consecutive quarter of negative GDP growth put the economy into a technical recession and prompted President Ramaphosa to announce an economic stimulus plan to help kickstart economic growth. The plan commits government to accelerate infrastructure spending, execute projects jointly with the private sector, lower logistics costs, simplify visa granting and implement telecoms and mining reform. While the plan highlights that government is finally listening to business, detail on execution of the plan is still lacking.
Against this backdrop, the SA Reserve Bank (SARB) kept interest rates on hold albeit highlighting that the softer than expected inflation data has upside risk to it. A combination of strong US economic data, higher US interest rates, a higher oil price and weak emerging market (EM) sentiment means the SARB will need to carefully balance a weak domestic growth profile with the potential for an increase in inflation.
The Rand (+3.59%) and the All Bond Index (0.17%) benefitted from the rallying EM sentiment off the back of a more stable outlook for Turkey and Argentina. However, equities suffered from the uncertainty and lack of growth. Financials (-3.2%), Resources (-1.1%) and the Industrials indices (-8.6%) all contributed negatively to the FTSE/JSE All Share Index (-5.0%). The MSCI World index was up (+0.4%) while the MSCI Emerging Markets index was down (-0.8%) in US Dollar terms. We marginally added physical duration to the portfolio over the month through exposure to the longer end of the curve. We also used bond options to lift duration as yields rose to attractive levels, providing portfolio protection should either idiosyncratic risks, or global factors (such as further emerging market weakness or higher developed market bond yields) lift domestic yields further.
The Sanlam Select Managed Fund had a challenging month, giving back recent gains in Aspen (disappointing results) and British American Tobacco. Blue Label also detracted from performance. Nevertheless, sectoral portfolio positioning has not changed drastically over the month. Despite volatility in government bonds over the month the portfolio benefitted from exposure across the curve. Credit enhancement further positively contributed to performance, whereas exposure to listed property, both domestic and offshore (which we have trimmed during the month), detracted from returns. We see good upside in many solid equity names, and see SA bonds yields as fairly well supported at current levels.