Sanlam Select Wealth Protector comment - Sep 2018
Market overview Global economic growth is likely to slow into 2019 The global economy continued to experience non-synchronised growth across the three major economic zones. In the United States, growth remains strong as the Trump tax cuts fuelled strong internal demand. Although US interest rates are rising they are still low relative to historical levels. The labour market in the US is very tight and we are seeing signs of building wage inflation. Output gaps continue to narrow and risk of further rate hikes seems high. The European economies are enjoying steady growth, but growing trade disputes could dampen prospects for the export dependent economies. Chinese economic growth is expected to slow from a relatively high base largely driven by slowing infrastructure spending. A further aggravating factor is the continued rise in the price of oil. If prices continue to rise from current levels it could trigger further pressure in emerging markets and weigh on global growth. As a result, the risk to global growth in 2019 is skewed to the downside.
South Africa’s economic prospects remain weak The South African economy remains weak, largely driven by poor demand and selfinflicted structural problems. Disappointingly, the formal employment sector continues to shed jobs, adding further downward pressure on consumption spending. The unwelcome rising cost of fuel driven by both an increase in the dollar oil price and the weak currency will also negatively impact consumption.
The stimulus package recently announced by President Ramaphosa, although well meaning, is unlikely to have much impact on overall growth as it will be funded from within the existing budget and is relatively small compared to the size of the economy. Having contracted in the first two quarters of the year, it is likely that even the subdued forecasts of growth for the full year will prove difficult to achieve. Negative sentiment towards emerging markets has impacted local equities Local equities were under pressure in September with the ALSI declining by 4.2%. The resource sector continued to significantly outperform the financial and industrial sectors achieving a positive return for the quarter. However, this return was helped by a very strong recovery in the platinum sector off a low base with Impala and Amplats both enjoying a strong rebound. Year-to-date the 21% return from resources is well ahead of the financial and industrial sector largely driven by currency weakness.
Property continues to contract but bonds were steady The property sector continued to contract, falling by 1% over the quarter. The falls were not limited to the Resilient group of companies as Growthpoint, the industry leader, also had a poor quarter, contracting by about 9%. Bonds had a flat quarter, producing a 0.8% return as long-dated yields rose by about 0.25% over the quarter.
The rand under pressure The rand had a very poor quarter, declining from R13.74 to R14.14 against the dollar, a decline of roughly 3%, and faring similarly against the other currencies. At it worst the rand hit R15.4 to the dollar but late in the quarter the currency did stage a welcome recovery. However, sentiment remains very fragile and further falls cannot be discounted. Fortunately, the rand did not suffer the losses experienced in the Turkish lira or the Argentine peso. Commodity prices remain largely flat to down except for oil Precious metals had a largely flat quarter with only rhodium having a strong advance of about 14% over the quarter. Since June 2016 rhodium has risen from 650 $/oz to 2589 $/oz, an advance of 300%. However, for the local producers the basket price has risen significantly as a result of the higher rhodium price and currency weakness. The platinum sector should produce significantly better results in the second half of the year. Base metals have on average declined over 2018 in US dollars and no major advance in US dollar base metal prices can be expected until China resumes its historically high spending on infrastructure. Against the trend of precious and base metals the oil price continues to strengthen, helped by the recent re-introduction of sanctions against Iran. As the world supply/demand balance is currently tight, further rises towards $100/bbl cannot be discounted. The key risk to the SA economy is rising inflation The key risk to the South African economy is a currency induced increase in the inflation rate requiring a tightening in monetary policy. The latest inflation numbers to August have yet to reflect the impact of the weaker currency and the rising fuel price, and at 4.9% remains well within the inflation targeting threshold of 6%. However, the trend is now up and higher numbers must be expected in the months ahead. If the inflation number settles above 6% the Reserve Bank may be forced to raise rates. Given the fragility of the economy this would be most unwelcome and it remains uncertain how the consumer would respond.
Portfolio Positioning Equities The fund remains underweight equities. Domestically focussed equities continued to underperform in the month of September on the back of negative sentiment toward emerging markets, as well as a slew of disappointing earnings updates which fell well short of market expectations. The repositioning of the portfolio earlier in the year away from expensively priced domestically focussed companies into attractively priced rand hedge counters continued to benefit the fund. Notably, two of the biggest companies listed on the JSE, MTN and Aspen, suffered significant share price declines over the quarter of 18.8% and 34.4% respectively. Truffle has not held positions in either of these stocks. Over the month, the fund increased exposure to Anglo American, Sasol, African Rainbow Minerals and The Foschini Group. These increases were funded by sales in Growthpoint, British American Tobacco, Redefine Properties and Nedbank Group.
Fixed income The fund remains short duration and has no exposure to fixed rate long duration bonds. We remain focussed on the shorter end of the yield curve through floating rate notes where we continue to earn a significant premium to the longer end of the curve without the same duration risk. Inflation risks both domestically and globally are building with risks to the upside especially if the oil price remains at current levels. The strong US dollar and reduced global risk appetite and mounting local fiscal slippage concerns suggest risk to local yields are to the upside.
Foreign assets We have remained defensively positioned with higher than normal cash holdings. We are underweight global equity largely on the back-valuation concerns. Headwinds of tighter US monetary policy and an escalating trade war could see risk aversion increase in the months ahead. We expect increased volatility to provide us with better entry points into global equities in the months ahead.
Contributors and detractors Top contributors for the month included Hulamin, Mitsubishi Corporation, Old Mutual, Anglo American and Investec Australia Property. Detractors included Sappi, Sasol, Naspers and Growthpoint.
The fund is a multi-managed portfolio with cautious risk qualities and will have a duel objective to provide a capital protection target over a rolling one year period and generate income over the medium term at low levels of volatility.