April 2019 Update
Making the News
For local investors, the biggest headlines in April centred around the elections and how the three largest parties will split up most of the votes.
The US economy grew by 3.2% (annualized, Q-on-Q) in the first quarter of 2019. This was above expectation and highlights the strength of the largest economy in the world. The US-China trade talks appeared to stall after making what appeared to be major head-way in the first three months of the year.
After failing to meet the initial deadline at the end of March for a Brexit deal to be in place, the UK secured an extension and now have until the end of October to secure a deal.
Digesting the News
The build up to the national election got into full swing in April, as each party looked to secure as many votes as possible. The major story lines seemed to revolve around how much support the ANC and the DA (especially in the Western Cape) can hang onto, how much of that vote the EFF can win, and what the implications of that will be for potential coalition governments in key provinces.
The uncertainty around the exact level of support for each party is further exaggerated by the large differences across polls conducted by multiple sources, including the parties themselves. There have been several views shared on what specific election results will mean for local markets, and what results will be positive for certain assets (most notably, SA Inc. shares and SA listed property). While most of this commentary has been sensible, we are hesitant to try and predict the outcome of the election, and how markets will respond to those results.
We only have to look back at the US presidential elections in 2016 to see that even a surprise result that was initially expected to result in a negative market response, can result in a very positive outcome.
On the global front, we remain of the view that a meeting of minds between the US and China is the most likely outcome, despite the noise surrounding the US negotiating tactics. Similarly, we expect that some clarity will finally emerge with regards to Brexit, as UK politicians become increasingly aware that the British people have finally run out of patience.
Markets in the Month
The SA Equity Market (as measured by the All Share Index – ALSI) delivered 4.2% in April, pushing returns in 2019 to 12.5%. SA Equity remains the best performing major local asset class year-to-date (YTD), with SA Listed Property the next best performing local asset class up 4.7% (YTD). Financials (up 7.6%) were the best performing sector for the month, although still lags the Industrial sector (up 14.5%) in 2019.
With the Rand strengthening in April, some Rand hedge shares gave up some of their gains from March (BAT -6.8%, Intu -11.2%). SA Inc. shares on the other-hand benefitted from improving sentiment towards Emerging Markets, with Telkom (+16.3%), Mr Price (+14.3%) and Foschini (+13.4%) among the best performers that lifted the market higher.
Despite the Rand strength (that is negative for the performance of foreign assets when measured in Rands) Global Equity delivered 2.9% in April, pushing the YTD performance for this asset class to 16.1%. Emerging Markets also delivered reasonable growth during the month (+1.5%), which lifted YTD returns to 11.8%, which is now behind SA Equity (+12.5%) so far in 2019.
Impact on Our Portfolios
Strong equity market returns (local and global) resulted in positive returns across all local strategies, with the more aggressive portfolios (i.e. portfolios with higher equity and listed property exposure) performing best.
The CWM Flexible and Balanced strategies performed best during the month (up 2.4% and 2.5% respectively) benefitting from higher Equity exposure (both Local and Foreign Equity). The CWM Flexible (+7.9%) and the CWM Retirement Growth (+7.7%) have performed best so far in 2019, bouncing strongly in the first four months of the year after a difficult end to 2018.
The more moderately positioned CWM Defensive and CWM RI Growth (i.e. less aggressive due to lower equity and property exposure) both delivered 2.0% during the month, with YTD performance up 5.7% and 5.0% respectively.
Following the Rand strength in April, the Rand is stronger against both the US Dollar and Euro in 2019 (drag on portfolio performance in Rands), although is marginally weaker against the Pound (1.4%) YTD. Despite the stronger Rand, the Core Wealth Foreign Balanced (+1.4%) and Foreign Equity (+2.5%) Houseviews were both up in April. YTD performance has also been strong across both strategies which were up 10.0% and 16.4% respectively, helped largely by global equities that are up 16.1% so far in 2019.
5 Year Returns (p.a.) CWM Local Model Portfolios / Foreign Strategies
The good start to the year has helped the shorter-term performance figures for both the local portfolios and foreign Houseviews. However, the low return environment over the last five years (where SA Equity is up 6.8% p.a. and SA Listed Property is up 5.8% p.a.) has limited the performance on these strategies.
Despite the modest absolute returns across these strategies over the last five years, we are reasonably satisfied with their relative performance (i.e. performance versus peers) with only CWM Retirement Growth and CWM Defensive marginally behind their respective peer group averages over this period and only CWM Retirement Growth behind inflation by 0.6%.
All the local strategies are ahead of their peers since their respective inception dates (2012/13), adding on average, an additional 0.8% above the peer group average each year. Similarly, both foreign HVs are ahead of their respective peer group averages over the last five years and since inception. These funds are ahead of their respective peer groups by 1.3% p.a. over the more 10 years since their inception.
Many analysts view this election as the most important since democracy in 1994, as a new president looks to solidify his position, not only as leader of the country but within his own party. While the results of this election are likely to give a good indication of the true support for President Ramaphosa, it would be short-sighted to think that a strong mandate (read: comfortable victory) alone will make his job of turning South Africa and its economy around an easy one.
There are plenty of headwinds facing the president and South Africa over the short to medium-term, and it will require some difficult decisions to ensure success in the long-term. This is likely to result in some volatility across local asset classes as investor sentiment is likely to swing between being overly optimistic to overly pessimistic, and back again.
Fortunately for investors, markets appear to pricing in most of the risks present and therefore opportunities are present for the patient long-term investor to profit.
At Core Wealth, we have not made any major changes to our client portfolios leading up to this single event and have not positioned the portfolios with any one result in mind. Rather, we have continued to implement our investment process with the same discipline that we always have, preferring to construct strategies that are robust enough to withstand negative market environments, but also sufficiently exposed to assets that will perform well should markets continue to rally after the election and over the medium-term.