Investment Summary December 2019

Another eventful year has passed us by at breakneck speed with little time for anybody to catch their breath. We truly hope that the December holidays provided you with a restful break and that you will be coming back to work refreshed and ready for 2020. After a difficult 2018, last year provided investors with healthy real returns as the inflationary environment remained subdued and riskier asset classes were rewarded. The table below shows the returns, in rands, for broad asset classes over a 1, 5 and 10 year period:

Although Local Equity (as measured by FTSE/JSE All Share Index) provided meaningful returns for the year, a more granular analysis by super sector shows large disparities in performance on the market. Financials performed the worst with a return of 0.9% and Resources provided strong returns of 26.5% over the year. The industrials sector slightly underperformed the broader market with a return of 11.0%. Interestingly the FTSE/JSE SWIX index returned 9.3% over the period underperforming the ALSI by almost 2%.

Global equity was the best performing asset class with healthy returns coming from developed markets, the US in particular, and emerging markets lagging once again. The global property market benefited from falling interest rates and offshore cash and bonds performed poorly as the rand generally strengthened over the period.

The PortfolioMetrix portfolios had a relatively good year with returns for the Regulation 28 Profiles ranging from just under 10% to 14% for Profiles 1 and 7 respectively. These returns fared well when compared to the standard balanced fund peers. Outperformance was mainly driven by strong alpha generated within the local equity building block as the PortfolioMetrix BCI Equity FoF returned 15.3% for the year. Below is a chart illustrating the performance after fees of the PortfolioMetrix Reg28 profiles in a risk/return scatterplot:

It was a divergent year of performance for balanced funds given the stark differences in returns within the South African equity market. Those that were early on the “SA Inc” trade got punished and those that maintained healthy exposures to commodities and commodity related stocks performed better. The average return of the balanced competitors above was just over 9% with the lowest return at -1.9% and the highest return at 13.1%.

Looking forward to the year ahead we do not anticipate any respite for investors. Many of the themes and risks of 2019 have been carried over to 2020 and can be expected to be more acute this year. South Africa faces a few headwinds in the first quarter of 2020 with all important events such as the State of the Nation address and the Budget Speech in February. This will be followed by a likely ratings review by Moody’s post these two events, the verdict of which weighs heavily on the shoulders of the Finance Minister and his performance in the budget speech.

Global growth remains positive albeit subdued with most not expecting a recession this year. This is, however, dependent on several factors including but not limited to:

Continued trade war negotiations between the US and China
The Brexit process
Monetary policy signalling and actions taken by central banks around the globe
Possible fiscal stimulus and inflationary pressures
Geopolitical risks and tensions

The year ahead will almost certainly provide opportunities and threats to investors. However, this is not much different to the way in which the world looked at the end of 2018. PortfolioMetrix intend on staying true to their philosophy of keeping portfolios well diversified, appropriately risked and ready to take advantage of opportunities in an intentional, measured and risk neutral fashion.

PERFORMANCE FEEDBACK – DECEMBER 2019

(Compiled by Nic Spicer and Brendan de Jongh)

December Overview

South Africans started the month of December in darkness as rolling blackouts were implemented by Eskom with the power utility ramping up to stage 6 load shedding for the first time ever. Although bad weather and sabotage played a role in the blackouts, the main reason for fragility to the power grid can be attributed to an ageing infrastructure that has been inappropriately maintained for many years. The affects were felt across the economy but the shutting down of mines made headlines and the loss of production and activity will certainly be felt in an already fragile economy. South African Airways was also placed into business rescue and an independent administrator was appointed to run the state’s passenger rail company. Inflation in South Africa fell to an annual rate of 3.6% for November (a nine-year low) and third quarter economic growth was negative at -0.6% (quarter-on-quarter, annualised).

Despite a bleak month from an economic point of view for South Africa the rand strengthened significantly on the back of global risk appetite. The table below illustrates the movement in the South African currency over the last month:

The Conservatives convincingly won the UK general election and now hold a parliamentary majority of 80 seats. This removed market uncertainty, both around Brexit and the previous possibility of a less market friendly Jeremy Corbyn led government. As a result, the pound strengthened by 1.7% from just prior to exit polls on Thursday evening to Friday evening. In addition UK equities rose, with the more domestically focused FTSE 250 jumping up by 3.4% on the day the result was announced with the FTSE 100 moving up by 1.1%. Subsequently Prime Minister Boris Johnson has committed to the UK leaving the EU on 31 January 2020, commencing the transition period, and having new trade agreements in place by the end of the year. Unsurprisingly, at its December meeting post the election result, the Bank of England did not change monetary policy although data during December indicated possible signs of a weaker labour market (average weekly earnings growth dropping to 3.2% annualised in October, the lowest level since September 2018) and subdued inflation (which remained stubbornly low at 1.5% in November). Business confidence, which has steadily declined since the start of 2018, fell again in December, although this was attributed to Brexit uncertainty, so all eyes will be on the January reading. In more positive news, final Q3 GDP growth came in at 0.4%, slightly above expectation.

The signing of the ‘phase one’ trade deal between the US & China eased geopolitical tensions during December, in addition data readings were positive over the month. US employment data was very positive in December as November’s non-farm payrolls also provided a boost to the US economy, with 266k new workers employed, much higher than had been expected (180k). In addition, the unemployment rate fell to 3.5% in November, matching the September 2019 figure which was the lowest since 1969. The final reading for Q3 GDP growth was released during the month, showing 2.1% annualised growth, a slight increase from 2% in Q2. Also, the Markit composite purchasing managers index (PMI) for November showed a jump to 52 from 50.9 in October due to strong activity increases in both the manufacturing and services sectors. With this economic backdrop, the US federal open market committee voted, in December, to maintain the current level of monetary policy.

European economic data released in December was broadly positive. The November composite PMI figure was revised upwards to 50.6 from 50.3 which was thus unchanged from October’s figure maintaining the slightly expansionary activity level (a bounce in manufacturing activity offsetting a dip in services). Inflation for November was confirmed at 1%, up from 0.7% in October, and core inflation (which is looked at by the European Central Bank for monetary policy decision making) was confirmed at 1.3% in November, a jump from 1.1% in October and its highest since 2015. On the other hand, consumer confidence took another dip down from -7.2 in November to a flash reading for December of -8.1, its lowest since early 2017.

Economic data for Japan was very positive during the month. The final reading for Q3 GDP growth surprised to the upside at 0.4% quarter on quarter, compared to expectations of only 0.2%, largely due to private consumption and capital expenditure being greater than first thought. Unemployment was also a positive surprise, dropping to 2.2% in November from 2.4% in October, its lowest level since the 1990s. Inflation picked up from 0.2% in October to 0.5% in November, due to food and housing price rises. And composite PMI data for November showed a jump to 49.8 in November, from 49.1 the previous month – admittedly still marginally in contractionary territory but moving upwards.

The announcement of the ‘phase one’ trade deal and the US not imposing new tariffs on $160bn of Chinese consumer goods provided some much-needed relief to Chinese exporters. This positivity flowed through to emerging markets more broadly. The Caixin composite PMI jumped to 53.2 in November from 52 in October. Inflation jumped further to 4.5% in November, above expectations of 4.2% and much higher than the 3.8% in October. This was attributed to high pork prices due to the recent outbreak of African Swine Fever.

Asset Classes

The month was characterised by a strong risk-on environment in which emerging market (EM) assets benefitted. Given the high beta nature of South Africa to EM, local assets benefitted from the change in risk appetite. The strengthening of the rand detracted from offshore asset classes with global cash, bonds and global property falling by similar amounts. The local equity market performed the best with local bonds also ending the year on a high note. In US dollars we can see the strong performance of EM equity as EM currencies generally strengthened and EM equity markets performed well in local currencies.

Below is a summary of performance of the broader asset classes for the month:

GPS PERFORMANCE FEEDBACK – DECEMBER 2019

GBP Asset Classes and Currency Performance

Emerging market equities was the strongest performing equity asset class in sterling terms, partly due to a more risk-on environment and assisted by currency strength enhancing performance in pound terms. As they did last month, UK equities also performed well largely due to the election result. Global property again had a weaker month as bond yields continued to increase.

Rising global yields also led to lower bond prices on the whole, with global government bonds performing worst. Riskier bonds, however, performed better in the risk-on environment with emerging market bonds rising significantly over the month.

The more domestically focused FTSE 250, up 5.4%, significantly outperformed the more international FTSE 100, up 2.8%, partly due to the more market friendly Conservatives gaining a convincing parliamentary majority in the election and also due to the stronger pound.

GBP ASSET CLASS PERFORMANCE FOR THE MONTH

GBP CURRENCY PERFORMANCE FOR THE MONTH

USD Asset Classes and Currency Performance

The US dollar weakened over the month against most developed currencies. As a result, asset class returns were more attractive when viewed in USD terms. The USD lost the most ground against the South African rand.