Satrix Capped ALSI Fund - Sep 19
In Quarter 3, the MSCI EMEA index (which includes South Africa) fell 7.02%, which was worse than the returns of that of the MSCI Emerging Markets (EM) at -4.25% and far behind the MSCI World’s 0.53%. Year to date, the picture does not change much with the MSCI EMEA at 5.13%, relative to the MSCI EM return of 5.89% and way behind the 17.61% for the MSCI World.
The Federal Reserve and the European Central Bank both eased policies to offset signs of weaker global growth. The US economy has weakened but is not in a recession mainly due to fiscal support offsetting the adverse impact of the trade war. The inversion of the US yield curve is perceived as tolling the bell for a near-term global recession whilst Draghi also added to the call for fiscal easing.
Adding to that, commodity prices took a dive with key iron ore benchmark prices plunging some 20% in a matter of weeks and the key industrial metal, copper, hitting two-year lows. The key global manufacturing indices have also dived and are at fiveyear lows - but was at least stable over the last two months.
In the UK, Eurosceptic Boris Johnson has become the prime minister after being elected as leader of the Tories. There appears a greater likelihood of a no-deal Brexit or, at the very least, yet another postponement of the October decision deadline. The market has discounted this in large part with a weaker Sterling. As business decisions get postponed, the UK could dip into a technical recession.
In South Africa the SA Reserve Bank held the policy rate unchanged at 6.5% at its September meeting, but its statement was more dovish than in July when it did cut. For Quarter 2 of 2019, GDP was 3.1% quarter-on-quarter, above the consensus of 2.4% and reversing the first three months’ contraction. SA headline CPI accelerated from 4.0% in January to 4.5% in March and then settled around 4.3% in August 2019. Forward rate agreements are now pricing in a 25bp rate cut in the next six months.
From a SA asset allocation perspective, cash (STEFI: +1.8%) outperformed SA Bonds (ALBI: +0.8%) and the FTSE/JSE All Share Index returned -4.2% (Capped SWIX: -5.1%) in the third quarter of 2019. In Dollars, the MSCI SA (-12.60%) continued to underperform the MSCI EM (-4.25%) mainly due to a weak Rand (- 6.9%). SA equities and SA bonds saw outflows of $5.7bn and $2.4bn respectively year-to-date. Properties, after stabilising somewhat over the first half of 2019, experienced a tough three months, losing about -4.4%.
On the corporate side the most important news was the Naspers spin-off of Prosus, which listed on 11 September 2019. Prosus is now the largest listed EU consumer internet company.
After a reasonable first half of the year equity markets experienced a tough third quarter. The FTSE/JSE Capped Shareholder Weighted All Share Index (CAPSWIX) was one of the worst performing general all share equity indices for the third quarter of 2019, down 5.11%, which was in line with that of the FTSE/JSE Capped All Share index (CAPALSI), which realised a return of -5.14%. Both these indices are still in positive territory for the year to date with the CAPALSI about 4% above that of the CAPSWIX.
The decline in the performance of the Capped SWIX index during the past three months was led by earnings downgrades. Brexit uncertainty and a decline in rental income weighed on Intu (-38.6%). Sappi (-31.6%) ended lower with no signs of recovery in dissolving wood pulp (DWP) prices, currently trading at their lowest levels in 30 years. Sasol (-27.7%) sold off on increased uncertainty, as Sasol delayed results due to suspected control weaknesses. Massmart (-29.7%) fell, as it reported its first interim loss in over a decade. Discovery fell by 23.5% given concerns that NHI could be disruptive for medical schemes. However, SA precious metals, particularly Northam (+40.9%), Impala (+36.6%), Harmony (+36.4%), Sibanye (+25.2%) and AngloGold (+11.8%), partially offset the decline in the indices, underpinned by higher gold and PGM basket prices and a weaker Rand.
Your portfolio performed in line with its benchmark despite very regular and larger flows into your fund. This was mainly due to our optimised model portfolio outperforming the Capped SWIX Index. One of the main reasons for this was the fact that our model avoided the significantly underperforming Arrowhead properties. Our optimised portfolio hold between 135 and 140 shares out of a possible 160 plus shares at an ex-ante active risk of between 6 and 8 basis points.
The unbundling of Prosus from Naspers went smoothly just before the major quarterly rebalance The effect of this unbundling was that the combined weight of the unbundled entities were higher (closer to 15%) than the about 10% in Naspers before the unbundling. During the September 2019 FTSE/JSE index review there were no constituent changes implemented on the index. Weight changes happened on Anglo American and Naspers. The one-way turnover was about 2%.
After four mediocre years, the market is starting to move closer to our estimate of value. In addition, there has been uncharacteristic macro volatility and many corporates have scored own goals through ill-timed acquisitions and venturing beyond our shores into areas where they do not enjoy a similar dominant industry position. Regulation has also proven more severe in a number of sectors and this has forced incumbents to operate under stricter scrutiny and with limited operational freedom. However, most of these issues have been discounted in current stock prices, and we back the strong management teams to guide their companies out of their current mire.
After a difficult period for the JSE, the market is trading on a forward P/E of 13x and an attractive forward dividend yield of close to 4%.
The fund tracks the FTSE/JSE Capped SWIX All Share index, a broad market index including 99% of the full market cap of eligible JSE listed companies. The constituents are weighted by applying a SWIX free float which represents the proportion of a constituent's share capital on the South African share register. In addition each constituent weight is capped at 10% at each quarterly review. The fund tracks the index using optimisation techniques.