Investment Summary August 2019 – Stephen Cloete & Associates

August was another eventful month in the market; offshore returns were bolstered significantly by the rand’s depreciation and domestic risk assets posted a second consecutive month of negative returns. Although we caution against short-termism, a review of the PortfolioMetrix performance since their last rebalance (05/02/2019) is rather insightful. Global asset classes (circled in red) have been the standout performers up in excess of 18%, whilst domestic risk assets (circled in green) have lagged considerably. Over this period, PortfolioMetrix portfolios have generated a return of just over 5.5%, a figure commensurate with SA bonds and cash. This illustrates the importance of diversification and how smaller components of one’s portfolio can incrementally contribute (or offset) the more muted returns of the “core” parts of the portfolio.

Naspers’ unbundling of its offshore assets into the Euronext listed company Prosus, with a secondary inward listing on the JSE occurred on 11 September. The immediate impact on our domestic benchmarks should be rather muted, with allocations to the “Naspers group” initially changing by roughly + or -3% depending on whether the benchmark is built using a capped or uncapped index construction methodology. A full write up on the unbundling and its implications can be accessed here. The long-term ramifications of the corporate action on JSE benchmarks and the make-up of the underlying fund manager’s portfolios will largely be a function of the resulting price movement, free float and their views with regards to the fundamentals of the respective companies.

PERFORMANCE FEEDBACK – AUGUST 2019

August Overview

Domestically, August was dominated by news surrounding Eskom’s debt, the NHI bill and to a slightly lesser extent Prescribed Pension Assets. Indications that the power parastatal was looking to offload R440 billion of its debt onto the government’s balance sheet resulted in aggressive rand sell-off. NHI and Prescribed Pension Assets became an emotive talking point amongst South Africans and neither policy has been viewed favourably by our capital markets. Investors have made it clear how they believe these headlines will impact the fiscus. Globally, the tensions surrounding US and China trade has fanned the domestic headwind having spurred significant capital flight as R25 billion looked for a home in less risky global markets. As one would expect rand hedge counters have provided some welcome respite to this SA Inc. turmoil and gold stocks experienced their best calendar month since February 2016.

SA inflation data surprised to the lower end, with year-on-year growth slowing to 4.0% in July, from 4.5% in June vs an expected read of 4.3%. Falling fuel prices, welcomed by motorists, was the primary contributor to the lower than expected growth number. Despite the lower than expected figure, the Reserve Bank is likely to retain a cautious policy stance considering the rand’s recent depreciation and the persistent vulnerability of our sovereign credit rating.

As alluded to, the rand has had a torrid month, losing ground against all major currencies. The table below summarises the rand’s performance for the month:

US headlines were taken up by trade tensions after Trump’s unexpected tweet threatening additional tariffs on China on the first day of the month. However, worrying data releases also featured as the August flash US Manufacturing purchasing managers index (PMI) fell to 49.9, its lowest reading since September 2009. The flash Services Business Activity index fell to a three-month low of 50.9 and the University of Michigan Consumer Sentiment index weakened. Consumer sentiment was likely negatively impacted by extensive media coverage of the inversion of the US yield curve in mid-August (2 year yields exceeding 10 year yields, contrary to the usual state where longer dated yields exceed shorter dated ones). There were some more positive releases though with retail sales jumping 0.7% in July, indicating a robust labour market and wage rises. US Federal Reserve Chairman Jerome Powell’s Jackson Hole speech was largely in-line with expectations, reinforcing the likelihood of another 0.25% rate cut in September with another cut likely in October or December. Second quarter earnings from US companies were positive overall, albeit subdued.

In the UK, Prime Minister Boris Johnson enjoyed a brief honeymoon period with his more muscular approach to Brexit negotiation generating largely positive news headlines (if little concrete progress). Brexit unease does however appear to be weighing on the UK with second-quarter GDP shrinking by 0.2%, while the outlook for retail sales weakened according to the CBI August survey.

European economic growth remained subdued at 0.2% over the second quarter, but Germany continued to struggle, contracting by 0.1% over the period. Expectations for German growth aren’t great either as the Bundesbank expects the downturn in orders for cars and industrial equipment to continue and IFO business climate index data confirmed the weak outlook. A ray of light emerged from the German finance minister who left the door open for modest fiscal stimulus. Flash composite PMI for the eurozone also showed growth stabilising. Expectations are for the European Central Bank to unveil further stimulus measures in September.

Chinese monetary and fiscal stimulus results have been mixed with July retail sales data coming in short of expectations. To cushion the blow of tariffs, China also allowed its currency to depreciate 4% against the dollar, through the psychologically important 7 to the dollar level (causing the US to formally label China a currency manipulator). Elsewhere in emerging markets, Argentina’s national primary election suggested that the current, market friendly, government could lose power in October which caused a 26% fall in the peso against the dollar and Argentina’s equity index to drop by over 40%.

Asset Classes

Local asset classes had a mixed month, risks assets (equity and property) lost further ground, bonds made back July losses and cash posted a positive return. The rand’s weakness against all major currencies resulted in global asset classes posting very lofty rand returns. Global interest rate sensitive asset classes (bonds and property) were the best performers in both hard currency and rand.

A summary of the month’s asset class performance is shown below:

GPS PERFORMANCE FEEDBACK – August 2019

GBP Asset Classes and Currency Performance

Due to market jitters equities across all regions lost ground in August, with Pacific ex-Japan being the hardest hit, this is largely due to the region’s indirect exposure to a slowing China. A flight for safety meant higher quality fixed income issuances (sovereign and corporate bonds) had a spectacular month as yields plummeted (and bond prices rose). Global property was the top performing risk asset as falling yields benefitted income producing listed property.

Somewhat unusually for a month of heightened Brexit pressure, the more internationally exposed FTSE 100 under-performed the more domestically exposed FTSE 250, down 4.1% and 1.1% respectively.

GBP ASSET CLASS PERFORMANCE FOR THE MONTH