Sygnia Africa Equity Comment - Oct 18
MARKET PERFORMANCE The third quarter of 2018 marked the 11th anniversary of the Global Financial Crisis and, as liquidity dried up over the US summer holidays, markets once again experienced heightened volatility. Emerging market contagion was the main driver as concerns spread from Argentina’s fiscal problems and IMF bailout and Turkey’s twin deficits to Brazil’s contentious elections, Russia’s US sanctions and South Africa’s economic recession. Global traders came up with another acronym: BRATS. South Africa is the only country within BRATS that has not seen its credit rating downgraded to junk, albeit our markets are pricing in that downgrade. Beyond the idiosyncratic risks of the BRATS, the strong US dollar and rising US interest rates continue to lead to outflows from emerging markets, weakening their currencies and forcing them to hike interest rates once again to anchor inflation, a vicious cycle that puts further strain on their economies.
According to Bank of America Merrill Lynch, the number of global rate hikes is now at levels last seen before the Global Financial Crisis. Turkey, in a sign of capitulation, raised interest rates from 17.8% to 24%, while Russia increased rates for the first time in four years. The only positive is that this has been perceived as confirmation that the central banks of both countries remain relatively independent. At the same time, Argentina and Kenya implemented austerity measures to appease the IMF. Together with weaker than expected US consumer price inflation, these policy adjustments brought some calm to the emerging markets and their currencies by quarter end. Despite violent swings, the rand was only 2.9% weaker against the dollar over the quarter.
The US economy continued to strengthen, with equity markets hitting new highs, consumer confidence at its strongest levels in 18 years and jobless claims at 49-year lows. This has allowed the US Federal Reserve to increase interest rates for the third time this year and upgrade their growth expectations for 2019. Merrill Lynch’s survey of asset managers’ expectations reported the most favourable outlook for US earnings on record, reflected in the valuation of the S&P500 Index, which has outperformed the MSCI Emerging Market Index by 20% on a year-todate basis. US focus will move to the mid-term elections of 6 November, where polls suggest that the Democratic Party is likely to take the House of Representatives, while the Republicans will keep the Senate. This is not ideal, but is likely to paralyse President Donald Trump on the domestic policy front. Irrespective of the results, however, he will retain free reign on foreign policy issues.
The picture looks less rosy for the rest of the world, hit by a strengthening US dollar, oil prices at four-year highs and global trade wars. Oil remains a headwind to growth and rose to US$85/barrel as Trump announced sanctions on Iran’s energy industry and Venezuela’s supply decreased due to their economic crisis. The OECD has announced that global economic growth has peaked and lowered its growth forecasts for 2018, predominantly due to trade wars.
There seems to be no end to the US - China trade war, with both countries implementing second rounds of tariffs in September and China boycotting the annual UN Summit held in New York. The new tariffs bring the total value of Chinese goods levied with tariffs up to US$250bn, and Trump threatened to expand tariffs to include an additional US$267bn of Chinese imports, taking the total to over US$500bn, roughly the size of all Chinese imports. The yuan weakened to a 12-month low and the Shanghai Composite Index fell to a low 25% from its January highs. Chinese growth is slowing and the Chinese government is attempting to support growth with both fiscal and monetary support, but these have yet to make an impact.
In Europe, the ECB kept interest rates unchanged while lowering its growth forecasts. The ECB confirmed that it will end its €2.6 trillion stimulus programme by the end of 2018, with a first hike likely only in September 2019. The UK’s exit from the EU remains on the cards, but there is no deal in sight, as neither party is willing to compromise on the key issue of free movement of people. Further East, Russia held its biggest war games in four decades after Russian Prime Minister Dmitry Medvedev called US sanctions a declaration of economic war.
In Japan, Prime Minister Shenzo Abe was reelected to his post on the back of the strongest economic growth in two years, despite inflation remaining close to zero and the Bank of Japan retaining stimulus measures. In Central and Latin America, Venezuela sold more oil assets to China in exchange for its badly needed financial support, a move that led Trump to threaten military action against the country. Sentiment remains unsettled by politics, with 41% of economic output from the G20 now governed by populists, up from about 4% in 2007. Brazil heads for key elections on 7 October. Italian Prime Minister Giuseppe Conte says his government can’t adhere to EU budget rules, which sent Italian bond yields skyrocketing.
In South Africa, President Cyril Ramaphosa called for the constitution to be changed to allow land expropriation without compensation, causing massive investor anxiety. Economic data remained weak and inflation subdued as SA entered recession. In response, Ramaphosa presented a viable economic plan based on refocussing R50bn of expenditure towards stimulating economic growth. The plan includes the introduction of more competition in the telecommunications sector to bring down data costs, relaxation of visa requirements for foreigners to stimulate tourism, easing of immigration restrictions to bring in badly needed skills, finalisation of the Mining Charter, a R400bn infrastructure fund designed to create jobs, more private/public partnerships and some clarity on the land appropriation issue. However, there are no short-term solutions to the problems.
The quarter ended with the FTSE/JSE SWIX Index down 3.3%, the JSE All Bond Index up 0.8% and the rand 2.9% weaker relative to the US dollar. S
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 -8.8%, despite the weakening rand over this period. Locally, ahead of its 2019 elections, the selloff in Nigeria continued as political uncertainty grew. Egypt and Kenya were also significant contributors to underperformance during the period.
There were no changes to the fund’s holdings 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.