Sygnia Africa Equity Comment - Jun 19
Developed-market central-bank policy easing has contributed to the longest-ever economic expansion – over 10 years. Global monetary policy easing reached new highs as the universe of negative-yielding bonds jumped to a record $13tn, gold to six-year highs and the S&P500 to all-time highs. Both the US Fed and ECB vowed to cut rates if necessary. The Bank of Japan has continued to ease monetary policy, because, on the back of trade tensions, global-manufacturing confidence indices have fallen into contraction, Citi’s Global Economic Surprise Index has experienced the longest period of disappointing economic data on record and the Brent crude oil price dropped 20%. Amid escalating disputes, the World Bank downgraded its global growth outlook to the weakest pace in three years, forecasting 2.6% this year. The largest threat to the economic outlook is U.S. President Donald Trump’s trade and tech wars, the latter being of particular concern, as 27% of the S&P500 Tech sector’s revenue is exposed to China. Trump has an incentive to keep the market buoyant with 2020 elections around the corner, but the risk of miscalculation is high when using untested tools. Trump said that his meeting with China’s President Xi Jinping at the G20 leaders’ summit in Osaka went far better than expected and that he would not increase tariffs. He added, however, that he was 'in no hurry' to cut a trade deal.
South Africa’s Q1 GDP fell the most in a decade, down 3.2% on the back of loadshedding issues. Seven of nine areas of the economy are in decline: agriculture declined a massive 13%, with farmers still unsure of their property rights, and mining was down 10% on power concerns. The rand lost considerable ground, breaking above R15 to the USD, and the yield curve rose to its steepest levels on record in response to a statement by ANC Secretary-General Ace Magashule that the organisation had decided to change the Reserve Bank mandate and begin “quantity” easing. The ANC’s economic transformation head, Enoch Godongwana, SARB governor Lesetja Kganyago, Finance Minister Tito Mboweni and President Cyril Ramaphosa confirmed that the party would not seek to nationalise the central bank nor expand its mandate. The South African Chamber of Commerce expressed concern that the government is “at war with itself”. The debt market is concerned about continuing to fund state-owned enterprises, after Ramaphosa announced more front-end loaded support for Eskom in his State of the Nation address. Inflation rose to 4.5% in May, but the SARB’s forecasting model suggests there is room for interest rate cuts.
The IHS Markit US manufacturing purchasing managers index (PMI) declined to 50.1, its lowest level since September 2009, and consumer confidence is at two-year lows. The Fed cut its inflation forecast and suggested a rate cut could happen as early as July unless trade tensions and economic data improve. The 10-year Treasury note yield fell below 2% as US rates markets moved to price in roughly three rate cuts from the Federal Open Market Committee (FOMC) in 2019. This aggressive move is normally only associated with an economic recession, but the Fed is changing the reaction function that will encourage an inflation overshoot.
Eurozone inflation expectations plunged to a record low (1.1% on the five-year forward rate) as investors worry that the economy is slipping into “Japanification”, an inescapable period of stagnant growth and low interest rates. Unsatisfied with the market’s view, Mario Draghi, President of the ECB, announced possible interest rates cuts and a fresh round of bond purchases. The TLTRO-III stimulus programme will start in September, and tax cuts have been announced in some of the major economies.
After three years of political deadlock over Brexit, the ruling Conservative Party is picking a new leader. Boris Johnson is the favourite to succeed Prime Minister Theresa May, and the new prime minister should be in place by the end of July. Johnson vowed to deliver Brexit with or without a deal. Brussels has underlined that it will not reopen Britain’s EU withdrawal deal, stressing that the next prime minister should honour the deal that Theresa May brokered.
China’s central bank added 500 billion yuan ($72 billion) to the financial system, the second-largest injection on record. The financial support was required after the government’s first seizure of a bank in more than two decades drove up funding costs. The Chinese services sector is holding up well despite a slowing manufacturing sector (Chinese factory output slowed to its weakest pace on record), and infrastructure investment is being encouraged in order to ensure growth does not slow beyond the government’s 'reasonable range'.
India’s central bank cut its benchmark interest rate for the third time this year, to 5.75%, the lowest level in nine years, and signalled the possibility of further easing in a bid to support growth. However, the central bank suffered a blow to its credibility after the resignation of deputy governor Viral Acharya.
Russia’s central bank cut the key interest rate and hinted at future reductions. Australia’s central bank cut interest rates to a record low of 1.25%.
Fitch and Moody downgraded Mexico’s credit rating against the backdrop of rising trade tensions. Fortunately, President Trump 'indefinitely suspended' his plans for U.S. tariffs on Mexico, removing the threat of a 5% tariff on Mexican imports.
Turkey’s opposition party, the Republican People’s Party, secured 54.2% of the vote in a re-run Istanbul mayoral election, striking a blow to President Tayyip Erdogan.
The Sygnia Africa Equity Fund maintained a diversified exposure to shares listed on Africa’s most liquid stock exchanges, in line with its investment objective.
During the quarter the fund had a total return of -1.3%, with the rand strengthening in the last month of the quarter. The largest detractor to the fund’s performance was the Nigerian equity market, with its central bank keeping interest rates unchanged from the previous quarter’s rate cut. Due to lower agricultural output, Morocco’s growth slowed compared to the first quarter of the year.
There were no changes to the tracked index’s constituents over the period.
The portfolio shall consist primarily of financially sound African (excluding South African) listed and unlisted equity securities, property shares and property related securities listed on exchanges, warrants, fixed deposits, fixed interest instruments, money market instruments, other interest-bearing instruments and assets in liquid form. Where foreign equity securities are invested in, such securities will be listed on an exchange which has been granted full membership by the World Federation of Exchanges (''WFE''). Where such securities are not listed on an exchange which has membership of the WFE, the manager will ensure that it has applied the due diligence guidelines determined by the registrar in terms of the Act. In addition, the portfolio may comprise participatory interests in collective investment schemes, whether listed on an exchange or not, and other forms of participation in portfolios of collective investment schemes in accordance with the provisions of the Act and applicable legislation, as amended from time to time. Where the aforementioned schemes operate in territories other than South Africa, participatory interests or other forms of participation in such schemes will only be included in the portfolio where the regulatory environment of the relevant territory is to the satisfaction of the manager and the trustees of a sufficient standard to provide investors with protection at least equivalent to that offered to investors in South Africa. The Manager may include unlisted forward currency swaps, listed futures and option contracts for efficient portfolio management. To the extent that assets in the portfolio are exposed to exchange rate risk, the Manager may include listed and unlisted financial instruments for the exclusive purpose of hedging exchange rate risk subject to the conditions and limits stipulated by the Act. For the sake of clarity the Portfolio may also invest in contracts for difference and listed depository receipts.The effective African (excluding South African) exposure of the portfolio will always be above 80%. The effective equity exposure will be a minimum of 80% of the market value of the portfolio.The portfolio will not follow a specific theme and the manager will have the flexibility to take advantage of short-term, as well as long-term events and themes within securities markets. In selecting securities for this portfolio, where possible, the manager shall seek to deliver maximum capital growth over the medium to long term at a reasonable level of monthly volatility relative to the African (excluding South African) equity and fixed interest markets.