Article by Albert Louw
From Trumponomics to local junk status!
The first quarter of 2017 and subsequent events that followed proved to be very eventful both globally and in South Africa. Whilst the market’s focus early in the quarter was squarely on the improving global economic outlook, rising inflation, Trump’s effectiveness in implementing policies and the path to Brexit, the real story was simmering below the radar closer to home.
Globally, the US Federal Reserve continued on its normalisation path and hiked interest rates by 25bps in March. However, this was followed by a dovish statement from its chairperson and as a result did not have a big impact on the markets. More uncertainty unfolded when President Trump lost on his attempt to repeal Obamacare – following this, investors have started raising questions on whether he can implement any of his promised policies. In Europe, the ECB remained unwavering on its quantitative easing program albeit at a slower pace. Notwithstanding this, improving macro-economic data has led to market expectations that the ECB could soon be winding down the program.
In United Kingdom, Prime Minister May officially started the Brexit process and it soon became evident that this will be a long process with many unknowns still to be worked out by the markets. On the local front, subtle undertones of political dissatisfaction had probably been there for a while, not only expressed at grass roots due to a deterioration in the institutional quality of many SOE’s, but also as evidenced by a growing divide between the President and former Finance Minister Gordhan, splitting the ruling party and more recently as highlighted in the emergence of “radical economic transformation” as the government’s new policy direction. Tensions bubbled to the surface late in the quarter culminating in a cabinet reshuffle and the dramatic removal of the Finance Minister, which lead S&P Global Ratings to downgrade South Africa’s international credit rating to below sub-investment grade status for the first time since 1994. A second rating agency, Fitch, followed suit and downgraded both the local and foreign currency denominated debt ratings.
Positive returns across assets classes
Most of the above events occurred late in March that it did not meaningfully impact returns for the quarter. The 2.5% return from SA bonds for the quarter – and similarly the 1.4% return from property – was generated on the premise of low but rising economic growth, falling SA inflation and the increased likelihood of a rate cut later in the year. The rand had strengthened for most of the quarter and finished up 1.9% relative to the dollar, which hurt rand hedge equity, particularly in February. Local equity was however up 3.3% for the quarter, driven largely by a strong performance from Naspers in March thanks to good results and Tencent’s purchase of a 5% stake in Tesla.
Global equities were also generally stronger, whilst global bonds yields rose (prices fell) as US inflation breached the 2% level and investors started to anticipate a quickening rate hike cycle. Emerging market equities rallied 11.5% over the quarter (China continued to provide strong support for commodity prices) outpacing Developed market equities which returned 5.9%. Global bonds retreated 0.2% as bond yields in most regions went up.
More surprises or not – volatility to remain
We urge investors to remain calm and patient as we can expect continued volatility and scope for surprises for the remainder of this year. As a multi-manager we take responsibility for manager/fund selection and our robust investment philosophy and approach enables us to make appropriate long-term decisions for the benefit of our investors. It is therefore very pleasing for us that our funds delivered strong returns through this volatile period with 94% of our funds in the top two quartiles over 12-months. Over three and five years these rankings continue to stand at 75% and 80% respectively - consistency is key in managing investor expectations.