Sygnia Skeleton Worldwide Flexible Cmmnt - Sep 19
The OECD cut its world growth forecast to 2.9% from 3.2% as intensifying trade conflicts take a toll on confidence and investment. On 1 September, the US implemented a further 15% import duty on $110bn of Chinese imports, and China retaliated by implementing tariffs on $75bn of US goods. With drone attacks on Saudi Arabia affecting more than half their oil supply and pushing the price of oil up nearly 20%, trade wars were eclipsed by the threat of world wars. The US, UK, France and Germany have blamed Iran for the attacks, with Trump saying the US is “locked and loaded depending on verification”; US-Iran relations remain a major risk to global stability, with global political uncertainty levels at a five year high.
Central bankers continue to do their best to support growth, with Bank of America Merrill Lynch’s Emerging Monetary Mood Indicator at its most dovish since 2009. September saw Russia’s central bank slash its interest rate for a third consecutive session, to 7%. Indonesia cut rates for the third time, the Turkish Central Bank cut the benchmark lending rate by 3.25% to 16.5% and the Brazilian Central Bank trimmed the benchmark rate by 50 bps to 5.5%. The SARB held our repo rate steady despite weak inflation of 4.3% in August.
The SACCI business confidence index fell to 89.1 points in August, the lowest level since April 1985. The Chamber noted that the “current state of fiscal deficiencies, social injustices and unemployment necessitates an urgent adjustment”, and Moody’s noted that Eskom’s financial position remains a significant threat to economic growth and government debt levels. However, the agency acknowledged that progress would be slow, offering South Africa a temporary reprieve from a sovereign downgrade for the next 12 to 18 months.
US consumer sentiment fell to 89.8 in August, the largest fall since 2012 and its lowest level during Donald Trump’s presidency, amid concerns about the impact of US trade wars. Federal Reserve data showed factory output falling for a second consecutive quarter. This allowed the Fed to lower the main interest rate for a second time this year, but due to steady inflation, the committee was divided on the need for further easing.
Despite lowering the key rate, US bank liquidity dried up in September, forcing the Fed to conduct its first repo auction in a decade, injecting over $400bn into US money markets as overnight repurchase rates spiked as high as 10% and threatened to bring markets and businesses to a standstill. This is a form of quantitative easing, as Fed reserves proved insufficient to fund the US banking system. Speaker of the US House of Representatives Nancy Pelosi announced a formal Trump impeachment investigation, in which Trump is accused of seeking foreign help from Ukraine to smear Democratic rival Joe Biden ahead of next year’s presidential election. However, the challenge is unlikely to pass given the Republican majority in the US Senate. inflation overshoot.
Despite massive opposition, ECB President Mario Draghi restarted quantitative easing and cut interest rates. From 1 November, bond purchases will be conducted at a monthly rate of €20 billion and will continue until interest rates are raised. Reinvestment of maturities will continue as long as necessary and well past the time that interest rates start to rise. The deposit rate was cut from -0.4% to -0.5% and, to support bank lending, a two-tiered system for reserves will be introduced, in which part of the banks’ excess liquidity will be exempt from negative remuneration on the deposit rate facility. Interest rates will only rise when inflation has robustly returned to the 2% ECB target.
UK manufacturing PMI fell to a seven-year low of 47.4 in August. The British parliament voted to force Prime Minister Boris Johnson to delay Brexit to 31 January 2020, and Johnson lost his second attempt to trigger an early general election. Parliament was prorogued until 14 October, but the UK supreme court ruled that Johnson’s advice to the queen to prorogue was “unlawful, void and of no effect”, and parliament reconvened on 25 September. Johnson was defiant and refused to resign or apologise. UK Chancellor of the Exchequer Sajid Javid unveiled a £13.8 billion boost to government spending in areas such as health, education and security – the largest increase in public spending in 15 years.
India’s economy grew at a slower-thanexpected rate in the three months to June, at 5 percent year-on-year. As a result, India’s government announced a reduction in the corporate tax rate to boost the economy.
The Chinese official manufacturing PMI eased slightly to 49.5 in August, staying below 50 for the fourth month in a row, while industrial output and retail sales grew more slowly than expected. However, Chinese service sector data for August showed its fastest expansion in three months. The People’s Bank of China announced a 50-basis-point cut in the reserve requirement ratio, which will take the cash reserves to their lowest since 2007. China also cut its one-year benchmark lending rate by 5bp (from 4.25% to 4.20%) for the second consecutive month in attempts to further support growth.
The Sygnia Skeleton Worldwide Flexible Fund returned 2.5% for the quarter, compared to its long-term target, CPI + 5% per annum, which returned 2.2%. Outperformance was driven by the Fund’s large offshore exposure and a large exposure to SA Income.
We started the third quarter of 2019 with a moderate underweight in SA Equities and a large underweight in SA Bonds. During the quarter, both SA Equities and SA Bonds fell to new lows as growth and political concerns within South Africa rose, culminating in a downgrade of South Africa’s credit outlook by Fitch. This local pressure was made worse by a global fear of emerging markets as trade wars and geopolitical risks increased. SA asset classes were driven to levels offering value and, as a result, we partially closed the SA Equity and SA Bond underweights. Buying these asset classes was supported by central banks, which are at their most dovish since 2009, with the Fed cutting rates twice this year and starting open market operations, and the ECB cutting rates further into negative territory and restarting QE. In addition, China has added further stimulus, cutting the lending rate twice and lowering reserve requirements to their lowest level since 2009.
These positions were taken in line with the Fund’s investment objective of providing superior longterm returns while protecting capital over the medium to long term.
The Sygnia Skeleton Worldwide Flexible Fund is a Worldwide-Multi Asset Flexible portfolio and shall comprise investments in multiple asset classes as set out below, both in South Africa and internationally. The portfolio represents Sygnia's best investment view at any time on the optimal combination of different asset classes required to achieve superior long-term returns at a reasonable level of risk. The portfolio exploits the benefits of diversification and will change its exposure to different asset classes on an active basis, based on prevailing market conditions.
The unconstrained nature of the mandate should ensure that risk of capital loss can be managed in an effective manner over both the medium and the long term via active asset allocation strategies.
The portfolio shall consist of financially sound equity securities, property shares and property related securities listed on exchanges, fixed interest instruments and assets in liquid form. The portfolio may also invest in listed and unlisted financial instruments, including derivatives, in accordance with the provisions of the Collective Investment Schemes Control Act and applicable legislation, as amended from time to time, in order to achieve the portfolio's investment objective. The Manager may also include unlisted forward currency, interest rate, index and exchange rate swap transactions for efficient portfolio management. In selecting securities for the portfolio, where possible, the manager shall seek to sustain long-term capital growth.
The portfolio may also invest in participatory interests and other forms of participation in portfolios of collective investment schemes, registered in South Africa and other similar schemes operated in territories with a regulatory environment which is, to the satisfaction of the manager and trustee, of a sufficient standard to provide investor protection at least equivalent to that in South Africa and which is consistent with the portfolio's primary objective.