We are halfway through 2019 and on paper it seems to have been a good year for investors thus far. That being said there has been much for markets to digest, spit out and re-digest as investors try to understand whether trade wars will escalate or if the global environment will return to “normal”. This has made the ride quite bumpy. The table below shows the broader asset class returns in rand terms year-to-date (YTD 31/12/2018 – 28/06/2-019)

Multi-asset performance of the PortfolioMetrix Profiles have largely captured the strong returns available in asset classes YTD with the tables below showing risk and return figures for the Regulation 28 and Discretionary profiles:

Looking at the local market, the resources sector has led the charge with the following returns across the super sectors in the All Share Index:

• FTSE/JSE Resources: +21%
• FTSE/JSE Industrials: +12%
• FTSE/JSE Financials: +5%

PERFORMANCE FEEDBACK – JUNE 2019

(Compiled by Phil Wellington and Brendan de Jongh)

June  Overview 

Economic releases for South Africa in June got off to a rocky start as Stats SA released GDP growth figures for the first quarter of 2019. On a year–on–year basis the economy did not grow, however the quarter-on-quarter figure surprised most with a contraction of 3.2%. Economists and the market alike were not expecting such a large decrease with expectations sitting at -1.7%. The fall in GDP was widespread with most sectors of the economy contracting, some worse than others. Factors contributing to the decline were the bouts of load shedding experienced, slow wage growth and higher income taxes. The growth environment contributed to another very low reading for the RMB/BER Business Confidence survey as it remained at 28, significantly below the neutral value of 50. Given this persistently low reading of business confidence, expectations for a strong rebound in second quarter growth remains low.

Following the GDP release, data seemed to trend in a more positive direction as manufacturing production and retail sales recorded strong growth in April. Inflation remained subdued at 4.5% y-o-y in May raising expectations of a rate cut in July given falling global interest rates, a stronger rand and a poorly performing local economy. Private Sector Credit Extension and M3 Money Supply increased by 7.7% and 9.1% y-o-y respectively in May, with the M3 figure surprising to the upside thus suggesting a more accommodative environment in an effort to increase activity in the economy.

Although economic data seemed lacklustre, the rand rebounded strongly in June against most major currencies as can be seen in the table below. This was mainly driven by global factors as opposed to a positive local backdrop.

The race for becoming the new Prime Minister has been at the forefront of UK headlines. The candidates were whittled down to the final two; Boris Johnson and Jeremy Hunt. Boris Johnson remains the strong favourite but the result of the final vote will be announced in a couple of weeks. Time will tell as to whether the new PM will be able to bring the Conservative party closer together and break the parliamentary deadlock on Brexit. The Bank of England maintained rates and quantitative easing at current levels in their June meeting although noted increased downside risks to growth. Shortly after the meeting, the Confederation of British Industry’s retail sales figure fell sharply in May (year-on-year), this was the largest fall since 2009. Manufacturing Purchasing Managers Index (PMI), however, dipped down further into contractionary territory, showing 49.4 in May and the June reading (released on 1st July) was 48, the lowest level since February 2013. On the other hand, services PMI picked up slightly to 51 in May, from 50.4 in April.

Trade tensions eased at the end of June, following on from a tense previous month. At the start of June, China increased tariffs to up to 25% on $60bn of US goods. But at the G20 meeting, at the end of June, President Trump and President Xi agreed to resume trade talks and the US backed down from imposing additional tariffs on $300bn of Chinese imports. In addition, President Trump said he would allow US companies to continue selling to Huawei. This may help to bolster business sentiment which has been on a downward trajectory for a while in the US. As reported last month, manufacturing PMI hovered just above 50, and the June figure, reported on 1st July, was a marginal increase to 50.6 – the second lowest figure since September 2009. The jobs market took a bit of a dip in May with non-farm payrolls recording only a 75k increase, well below the expectation of a 185k increase. US personal consumption expenditure (PCE), the Federal Reserve’s (Fed) preferred inflation measure, stood at 1.6% in May, unchanged from April’s upwardly revised reading. The market had priced-in a 25% probability of a rate cut at June’s monetary policy meeting, but the final decision was no change to policy, despite citing greater uncertainty around the economic outlook. The market is now pricing-in at least a 25 basis points cut at the July meeting and one more before the end of the year.

Manufacturing data continued to be poor in the Eurozone, the flash PMI edged down to 47.6 in June from 47.7 in May – the fifth straight contractionary month. This is still being driven by significant weakness in Germany which registered 45 in June, in particular due to a slowdown in the auto industry. On the other hand, Eurozone unemployment fell to 7.5% in May, the lowest level since July 2008. Mario Draghi (ECB President) noted in June that additional monetary stimulus will be needed in the absence of any improvement to the outlook for growth and inflation – specifically citing reducing rates further.

In Japan, the final Q1 GDP reading (quarter-on-quarter) was recorded at 0.6%, revised upwards slightly from the preliminary reading and market expectation of 0.5%. CPI inflation dropped slightly to 0.7% in May, following a sharp spike to 0.9% in April.

After the G20 meeting, Chinese exporters (who export to the US) would have been relieved at the news of no additional tariffs being imposed by the US for now. And the resumption of trade talks will hopefully improve business conditions, which have been slightly weaker lately. Both the business confidence survey and manufacturing PMIs in China were recorded in contractionary territory (49.4) in June. Further deterioration in trade talks could weigh further on business sentiment.

Asset Classes

Much of the losses in May were recovered in June as all asset classes rose strongly in local currency. Given the rands meaningful strength over the month, offshore property, bonds and cash lost ground in rand terms. However, this was more than made up for with risk assets in general having a strong month. Local equity was the strongest performing asset class for South African investors in June with local cash the weakest performer.

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

GBP Asset Classes and Currency Performance

June was a strong month for all asset classes, although risk assets tended to benefit more. Europe ex-UK equity was the top performer of the month, followed closely by US equity, both buoyed by accommodative central bank rhetoric.

All fixed income asset classes had positive returns over the month as yields continued to fall. Riskier bonds, particularly Emerging Market bonds, were the strongest performers.

The ongoing lack of clarity around Brexit appears to still be weighing on domestic focused companies and meant the FTSE 100 had a slightly better month than the FTSE 250, up 4.0% and 2.9% respectively.

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 as the ten year yield fell to around 2% on the back of subdued economic performance and hence lower inflation expectations. Given this, the market started pricing in interest rate cuts in July. The weakening dollar buoyed globally diversified index returns viewed in US dollars.

USD ASSET CLASS PERFORMANCE FOR THE MONTH

USD CURRENCY PERFORMANCE FOR THE MONTH