Satrix Mid Cap Index Fund - Mar 19
In December, the MSCI All Country World Index (ACWI) fell 7.2% in US Dollar, which is the worst December return for global equities on record since 1988. For the year, global equities returned a very disappointing -11.2%, which is the worst year since the 2008 Global Financial Crisis and the sixth worst year on record. Despite underperforming MSCI ACWI significantly in December, the US was the best performing region in 2018.
This performance was on the back off expectations that global growth is slowing, a tightening monetary policy, swelling fiscal deficits, earnings headwinds, and political uncertainty, which are all very legitimate and will probably grow more pronounced over the coming months and quarters. The Chinese PMI disappointed with the Shanghai stock exchange down 19% for the year despite the government attempting to stimulate demand by cutting the bank reserve requirement four times. The Brexit vote, which will take place in January, also created much uncertainty in the UK and the rest of Europe. Emerging Markets (-2.9%), Asia Pac ex-Japan (- 3.0%) and Europe (-4.7%) fell less than the global aggregate in December, but finished 2018 as the three worst performing regions.
However, the correction over the course of the last quarter of 2018, in particular the December meltdown, was probably too violent, overstating the immediacy of the aforementioned market risks.
Returning to South Africa, in comparison the local market underperformed emerging markets (EMs) materially in 2018, opening up the possibility of better performance in 2019, particularly for domestic focussed stocks in the SA market.
The poor returns from equities were on the back of poor business confidence which remains very weak as demonstrated by the South African Chamber of Commerce and Industry (SACCI) business confidence data. Private sector fixed capital formation has collapsed from 17% of GDP in 2007 to lows of 11% of GDP currently. Political uncertainty also weighed on the JSE as the finance minister’s confession at the Zondo commission of enquiry led to his recall by the president ahead of the Medium Term Budget. However, the appointment of former Reserve Bank Governor, Tito Mboweni - our fourth finance minister in three years - calmed the market’s nerves.
Following three months of negative total returns, SA Equities rebounded in December, with the ALSI (+4.3%) returning its second best monthly performance for 2018.The ALSI performance was boosted by SA Resources (+12.3%), posting its best monthly performance since July 2017.This was boosted by the Gold index that jumped a huge 25.2% in December, as investors looked to gold as a safe haven amid the global turmoil and US government shutdown.
During 2018 SA Equities (ALSI) lost 8.5% against 21% and 2.6% gains during the two previous calendar years. This was SA Equities’ worst annual loss since 2008 when the ALSI also lost about 8.5% in Rand terms. Across the JSE sectors, the dispersion of returns was very wide with Resources outperforming in 2018 with a total return of 15.5%. SA Financials shed 8.8% and SA Industrials were the worst performers among SA equities, losing 17.5% over the year.
The SAPY was the worst performing asset class with a total return of -25.3% (2017: +17.2%, 2016: +10.2%). Cash posted a total return of 7.2% in 2018 whilst SA Bonds were the best performing asset class, with the ALBI delivering a total return of 7.7% (2017: +10.2%).
The FTSE/JSE Mid Cap index (J201) was one of the few benchmarks with positive performance (+2.68%) in the fourth quarter of 2018. The resources sector was the biggest contributor to this positive performance with Anglogold (ANG), Gold Fields Ltd (GFI) and Impala Platinum (IMP) all in positive territory, returning 48%, 45% and 33% respectively. The Real Estate and Financial Services sectors were some of the worst performing sectors in the benchmark, which included counters like Intuprop (ITU) and Quilter (QLT), down -24% and -12% respectively.
During the December FTSE/JSE index review Vivo Energy plc (VVO) was deleted from the index. There were no inclusions in the index. The one-way turnover for the index review was 0.51%.
If the first week of trading in 2019 is anything to go by, then market participants look set for another volatile year. The week started off positively, buoyed by Trump’s tweet of ‘big progress’ between the US and China on their ongoing trade war. Despite the short-term positive, though, the fact remains that the three major economic issues of the US-China trade war, slowing economic growth and Brexit have yet to be properly resolved and until this is done, a sword of Damocles will remain hanging over global markets. We have been there before in 2008 when many expected a decade-long bear market for equities. And yet businesses adapt and adjust to tough economic conditions and in this context, we are of the view that patient equity investors will be rewarded with handsome returns over the next three years.