Sanlam Select Managed coment - Jun 19
Markets bounced back in June, reversing the sharp drop in May amid improved investor sentiment. US and China trade tensions have been central to investor fears for some time, but the end-June G20 summit and the meeting between President Xi and President Trump encouraged renewed hope for a de-escalation of these tensions. Trump's successful shakedown of Mexico, getting them to agree to police their border in exchange for no new tariffs, also improved sentiment.
Despite weak growth conditions and likely fiscal deterioration, local government bonds were supported in a risk rally following synchronised dovish messaging from the European Central Bank (ECB) and the US Federal Reserve (Fed), in response to slowing global growth. ECB president Draghi said that additional stimulus would be required as inflation has failed to reach target levels, signalling the potential for both further cuts in the policy interest rate and additional asset purchases. Across the Atlantic, the Fed's dot plot indicated that eight out of 17 participants anticipate that cuts will be appropriate in 2019, with seven participants signalling 50 basis points of cuts before the end of the year. Fed chair Powell said that the central bank was still monitoring the economy for signs of weakness and would act as appropriate to sustain the expansion. He also referred to a changed global risk picture, partly due to greater uncertainty over trade. While Europe entered its summer political lull, the UK finally faced the Tory leadership battle 'endgame', and an apparent acceptance that a hard Brexit was both likely and priced into Sterling and UK growth forecasts.
Escalating geopolitical risk between the US and Iran, as well as an extension of supply cut agreements between Saudi Arabia, Russia and Iran (for another six to nine months), led to an almost 8% increase in the oil price (to over US$66.50/barrel), presenting some upwards risk to the inflation outlook. While these tensions seem unlikely to abate in the near future, and may lead to elevated oil and commodity prices for some time to come, inflation expectations globally remain fairly muted at this stage in the cycle and are not currently threatening accommodative central bank policy. Domestically, interest rate cut expectations were initially fuelled by the first-quarter GDP print of -3.2% that was well below consensus expectations of a 1.6% contraction. These expectations were further supported by the release of May's headline inflation of 4.5%, with inflation coming in at or below the mid-point of the South African Reserve Bank's inflation target range. Taking these dynamics into account, market participants are pricing in a 25- basis point cut at the July 2019 meeting.
In South Africa, the politically-induced stagnation continued and the Rand suffered renewed volatility in the face of lingering concerns around the SA sovereign rating. Clear signs of policy actions to accelerate growth and stabilise government finances are essential, as are urgent steps to address Eskom's debt and operational challenges. A somewhat wishful State of the Nation Address did little to encourage local optimism. President Ramaphosa highlighted seven focus points for government, centred around growth and reform. He also announced accelerated funding for Eskom. The lack of implementation on Eskom's turnaround plan was a clear disappointment for the market, leading to a sell-off in the long end of the curve as increased issuance is expected to fund the additional support to Eskom. Following a meeting between Treasury and London investors, media reports suggest that the front-loaded fiscal support will ensure that Eskom is a going concern for two years, during which the soon to be appointed chief restructuring officer (CRO) will have to produce a plan to deal with Eskom's debt. The government has apparently guaranteed that investors won't suffer any losses. We understand that the Eskom Sustainability Task Team has submitted their final report to the presidency and that a CRO and team have been identified, to beannounced in mid-July. Overall, the domestic fears were overcome by the bullish global backdrop, which brought bond yields nicely lower, and stabilised the Rand back at the low R14 level.
The Sanlam Select Managed Fund's equity positioning benefited from the market rally. Positive contributors in June were AngloGold, as well as resources counters Anglo American plc, Northam, and BHP. Negative contributions came from weakness in our SA Inc shares like Tsogo Gaming (despite the unbundling of the hotel operations, which should have lent support), Motus, Massmart, as well as company-specific Sasol weakness.
Our equity portfolio positioning is always determined bottom-up, based on individual company fundamentals. We have found improving prospects hard to come by, but SA equity value based on normalised metrics is attractive to us, and we have continued to build exposure to shares like Motus, Barloworld, and Pioneer Foods into this ongoing weakness. When viewed from a sectoral perspective, our portfolio is fairly evenly balanced across sectors, and includes cheap defensive shares as well as cheap cyclical exposure, poised to benefit from improved growth.
The fund's fixed-income positioning benefited from exposure to nominal bonds. The FTSE/JSE All Bond Index returned 2.23% for the month in the context of globally falling yields. Exposure to inflation-linked bonds and credit enhancement further contributed to returns, slightly offset by an appreciation in the Rand. We took advantage of a rally in local bond yields following dovish international central bank rhetoric and the improved risk-on environment, by reducing some bond exposure and could reduce duration further into episodes of strength.
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.