Sanlam Select Wealth Protector comment - Jun 19
Financial markets bounced back from May's retreat Global markets bounced back strongly from May's contraction despite many of the markets' pressing issues remaining unresolved. Firstly, while the trade negotiations between the US and China are back on track, it will take compromise from both sides to reach an agreement.
The global economy is currently going through a synchronised slowdown that has seen developed central banks pivot towards more accommodative monetary policy. This more dovish stance by developed central banks has opened up room for emerging markets to also cut rates. Given the limited room for conventional monetary policy, we may yet see central banks turn more aggressively towards fiscal policy in an attempt to avoid a recession in the years ahead.
The S&P 500 Index advanced 6.9% in June, representing one of the strongest moves seen in recent times, driven, in the main, by the pivot on interest rate policy from the US Federal Reserve.
Much has been said about the demise of the current global equity bull market that, by many measures, is very mature. Earnings have already enjoyed a very strong advance over the last half-decade and are looking like they are in the top-of-cycle range. It is unlikely that earnings growth on its own can sustain further equity gains. The key risk to the current equity bull market would be earnings disappointments into 2020, or an unexpected rise in interest rates resulting in an upward spike in equity yields.
South African markets followed suit
In June, the FTSE/JSE All Share Index (ALSI) produced a total return of 4.8%, having fallen by 4.8% in May. This brings the year-to-date return of the ALSI to 12.2%. All sectors contributed to the performance in June, although the Financial sector and the Resources sector outperformed the Industrial sector by 3% and 2% respectively. The more broadly-based FTSE/JSE Shareholder Weighted All Share Index experienced a more modest advance but was still up 3.1% in the month and by 9% year to date.
Bonds, too, enjoyed a good month with yields at the long end softening by about 20 basis points. Real yields remain high by historical standards. However, the Property index continues to lag, being barely in positive territory year to date. As the sector generally lags the economy, distribution growth is likely to disappoint for several years to come.
SA's economic performance is cause for concern
The SA economy is currently trapped in a cycle of low economic growth and high unemployment that, if not arrested soon, could result in a major crisis. The current trajectory is leading to greater levels of poverty and inequality that increase the probability of economic instability.
Spending on badly needed infrastructure is also declining as seen in the demise of the local construction industry. Barring an export-led windfall, the only sustainable path to higher economic prosperity is to increase employment, bringing in more people into the consumer economy. Despite the President's State of the Nation Address, we have yet to see decisive action taken on critical structural reforms that are necessary to move us out of the low-growth environment.
The currency has been surprisingly strong
Given the country's disappointing growth outlook it might have been expected that the Rand would remain weak; however, this has not been the case. A consequence of our low-growth environment has seen imports decline and with rising commodity exports the country has experienced an improvement in the external trade balance over the recent months. Inflation has also been stable, surprising most economists on the downside. These metrics have underpinned the strong Rand and are likely to lend stability to the currency in the short term, in spite of the weak fundamentals.
The fund remains conservatively positioned with a relatively low equity weighting. Within equities, we have a higher weighting in the Resources sector and Industrial Rand hedges, all of which are still enjoying earnings growth as a result of a growing global economy. South African-focused stocks continue to struggle in the current low-growth environment. SA corporate margins are being squeezed by increasing costs, which corporates are unable to pass through to consumers given the poor economic backdrop. If the broader SA economic backdrop does not improve, we expect that SA-focused stocks will continue to struggle to deliver real returns, increasing the probability of a value trap.
Over the month the fund reduced exposure to Naspers, Sasol, ABSA and FirstRand. We increased exposures to British American Tobacco, Impala Platinum, and Philip Morris.
Unchanged from the previous quarter, our fixed-income assets remain predominantly invested in the floating rate subordinated debt of SA's top five banks, where we are earning approximately 120 basis points above government bonds with no equivalent duration risk. Investment opportunities in the corporate debt market outside of the banks are few and far between, with huge oversubscription, because of the lack of issuance, driving the yields down to unattractive levels. While real yields on longer-duration bonds look superficially attractive, the deteriorating fiscal position of the country means the probability of a ratings downgrade into 2020 remains high. As a result, we continue to prefer shorter duration assets.
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.