Investment Summary September 2019 – Stephen Cloete & Associates

In the past month there were a few important economic releases indicating that South Africa is growing too slowly. Business confidence is at a 20-year low and manufacturing is contracting, consumer confidence and inflation have also been confined to low levels. There is no obvious economic catalyst, and the Reserve Bank has held rates at 6.5% during a period when most central banks have cut rates.

Perhaps the shot of adrenaline that we need to spark our economy is that of a looser monetary policy? Then again, a shot of adrenaline in the absence of follow-up care and recovery does little for our economy. The finance minister’s recent policy paper is hopefully the unpopular kick start to policy reform that is so desperately required – we mustn’t forget that the 30th of October marks the release of the “mini-budget” (MTBPS) and should give us an indication of the Government’s spending intentions.

The current economic outlook is grim, the past has been painful, yet Don Coxe likely puts it best when he said “The most exciting returns are to be had from an asset class where those who know it best, love it least, because they have been hurt the most.”

We are fortunate that once again the resilience of South Africa and South Africans is on display in all its glory both at home, and in Japan as the Springboks fight it out to win a third Rugby World Cup, and the positivity that would seed would be welcome.

PERFORMANCE FEEDBACK – SEPTEMBER 2019

September Overview

The month of September provided some challenging domestic economic reads such as a YoY GDP growth of 0.9% (2019Q2). Fortunately, we saw a recovery in the quarterly figure which would have otherwise confirmed a technical recession. Recession or not, businesses are not spending or investing in our economy and this is unlikely to change until reforms inspire a little confidence. The last time SA Inc. was this pessimistic was in the midst of failing emerging markets in the late 90’s. It certainly must have seemed dark as the otherwise stable capital markets came crashing down, perhaps comparative to where we find ourselves now. After all it is darkest just before the dawn.

Observing the charts below (source: Trading Economics and Statistics South Africa) it is apparent that:

1. The subsequent 10 years (with a dotcom bubble included) provided stellar economic growth here at the southern tip of Africa,

2. Business confidence has barely breached 50 (signalling net optimism) post the 2008 financial crisis.

It is also not surprising to see a contraction in Manufacturing (ABSA PMI recorded 45.7), and disappointing retail sales figures. Additionally we recorded a Trade Surplus of R6.8bn in the month of August (released in September) which typically should be seen as a positive marker, this however was the result of contracting imports and growing exports (not likely manufacturing driven). All these markers point directly to a consumer that is under pressure and low on confidence, as confirmed by a stable and low inflation rate which is only being driven by administered price increases such as Rates and Taxes, municipal services, etc.

There are of course other South African exports that we can be proud of, such as the largest technology listing on the Euronext European Stock Exchange in Amsterdam. Naspers spun-out their quasi-venture capital businesses into what is known as Prosus. The process was anything but straight forward, but a successful placement of Prosus saw the market value the business at R1.8trn.

For a change the rand was actually quite subdued when measured from point-to-point. Of course, during the month the rand strengthened by more than 4% against the US dollar (later giving that gain up). Government’s ability to raise R74bn in a Eurobond auction also indicates the attractive yield currently on offer.

Casting our view to global events; The Brexit saga continued in the UK, with parliament passing legislation that will force the government to request an extension if it can’t agree an exit deal with the EU before 31 October 2019. Parliament was then suspended (prorogued) by the prime minister but this suspension was later declared unlawful and void by the UK Supreme Court. Despite the drama, markets interpreted these events as reducing the chance of a messy exit on 31 October which caused sterling to strengthen. The Bank of England kept rates on hold, balancing strong wage growth of 4% year on year against Brexit risk and poor business survey results.

Early in the month, the US and China agreed to reopen trade talks, with China following up later by scrapping some tariffs on US imports as a good-will gesture ahead of talks due on 10 October . The US Fed reduced rates by 0.25% in September as expected (after doing so for the first time in July). The US economy continued to add jobs, but the pace of growth of aggregate hours worked slowed and consumer confidence declined meaningfully.

In Europe, data continued to be weak, led by manufacturing data (and in particular very weak purchasing manager surveys in Germany). The ECB responded to poor economic data and a weak outlook by cutting its deposit rate by 0.1% to -0.5%, as well as restarting quantitative easing on an open-ended basis until its inflation targets are met. It is hoped that this open-ended QE will support fiscal stimulus should it be put in place by eurozone governments (as the ECB has been urging for quite some time). Crucially, to buttress lending within the eurozone, it also implemented a system of ‘tiering’ to lessen the effect of the rate cut on weaker eurozone banks.

Japan saw a decline in consumer confidence as it geared up for an increase in the consumption tax from 8% to 10% on 1 October. The Bank of Japan held rates firm during the month but did hint at a change at its next meeting.

The Chinese economy continued to slow, with industrial production growth running at 4.4%, down from 7% at the start of the year. Retail sales also slowed, to 7.5% from almost 10% in early 2018.

Asset Classes

Global property was the lead performer this month as local bonds, cash, and risk-assets posted positive returns. There was some strong intra-month movement that these figures don’t fully reveal but short-term volatility is a natural product of the markets. Little return was sourced through any rand movement and so in rands both local and global assets performed similarly.

Bond yields also rebounded strongly at the start of the month, before pulling back slightly. Nevertheless, a general increase in yields from the lows of August saw longer duration bonds, and in particular global inflation-linked bonds, suffer. Global high yield was the top performing bond sector on the back of falling credit spreads.

GPS PERFORMANCE FEEDBACK – September 2019

GBP Asset Classes and Currency Performance

A reversal of fortunes in September saw a broadly positive performance from most asset classes and regions after August’s disappointing pull-back. The markets take on Brexit proceedings meant the sterling strengthened and confidence buoyed risk appetite of UK equities. Interestingly it was the regions that have been underperforming most that offered the higher returns in September, such as the UK, Japan, and Europe.

GBP ASSET CLASS PERFORMANCE FOR THE MONTH

GBP CURRENCY PERFORMANCE FOR THE MONTH

USD Asset Classes and Currency Performance

The US dollar held steady over the month, allowing purer asset class performance to come through. Generally underperforming regions came back strongly in September whilst bonds sold off.

USD ASSET CLASS PERFORMANCE FOR THE MONTH