January 2018 Update
Making the News
The JSE all share index was flat in January, despite the increased investor sentiment in South Africa following an expected smooth political ground ushered in by the change in the country`s leadership. The Rand continued to strengthen against the USD during the month.
The property index was down 9.9% for the month mainly driven by the rumours that the Resilient group of companies might be involved in some governance scandals, spiking bond yields (in the US) and a stronger rand. However, investors will still benefit from the dividend pay-outs of at least 75% of income, which REITS (Real Estate Investment Trusts) must do by the South African Law.
As expected, the South African Reserve Bank (SARB) left interest rates unchanged (6.75%) at its 18 January MPC meeting, despite sluggish growth.
Digesting the News
The improving political and business sentiment, as well as global equity gains, gave support to the local equity market in January, but returns were hit by weakness in Naspers shares, Property stocks and a negative research report on Capitec released by US group Viceroy, which caused its share price to plummet.
In December 2017, Viceroy Research highlighted that their next target is a South African company. The rumours caused a lot of nervousness and panicking in the market which lead to a decline in property stocks as the market suspect that the company could be the Resilient Group of companies.
The possible reason why the Resilient group of companies is seen as potentially vulnerable is based on the complex corporate structure and cross holdings which add complexity to the group. This might cause more fluctuations in the share prices as investors try to analyse the intrinsic value of the company.
Core wealth managers was able to avoid this declined in the property share prices through our good manager selection. Our preferred manager in the property space (Nedgroup Investment Property) has no exposure to the Resilient group of companies. During the month the property sector struggled down 9.9%, Nedgroup property outperformed the sector by 10.5% in January. We do understand that past performance alone is not a good indicator of future performance, however we use property to increase our diversification across all asset classes in our portfolios and good manager selection is key.
Markets in the Month
The local equity market as measure by the FTSE/JSE was broadly sideways for the month of January ending the month flat at 0.1%. However, on a 12-month rolling basis the market returned 16.1%. Listed property (SAPY) plunged sharply in January (-9.9%) on the speculation that the companies in the Resilient property stable would be mentioned in an unfavourable corporate governance report by Viceroy Research. The Bond Index (ALBI) was up 1.9%.
The Rand ended the month 3.4% stronger against the US dollar, 1.0% stronger against the Euro and 1.6% weaker against the Pound. Gains in the Rand were supported by the continued revival in sentiment, as Cyril Ramaphosa’s commitment to rooting out corruption (through forging ahead with the inquiry into state capture), a firm stance on the unaffordability of nuclear energy and an overhaul of Eskom’s board have rekindled hopes for structural reform, necessary to lift the country to a higher growth plane in the medium term.
Impact on Our Portfolios
As a result of the sideways movement of the market during the month, January was a moderate month for our model portfolios. The range of returns across the local CWM Model portfolios was -0.2% to +1.1% in January, with CWM Flexible the best performing local strategy. Our Global Houseviews, CWM Foreign Balanced and CWM Foreign Equity were up 0.14% and 1.5% respectively.
3 Year Returns (p.a.) CWM Local Model Portfolios / Foreign Strategies
While all portfolios generated wealth by outperforming inflation, the moderate returns delivered by the local equity market and recent Rand strength has resulted in moderate performance over the last 3 years.
The stronger returns from growth assets in the last 6 months has begun lifting the returns of the more aggressive longer-term strategies (CWM Retirement Growth and CWM Flexible) relative to the more conservative strategies (CWM Income and Defensive).
Many South Africans are much more positive, business confidence is gradually recovering, and our currency is looking much healthier. In contrast, international markets are struggling while the global economy grows. February is a very important month for South Africa as everyone looks to see the resolutions in the budget and possibly the resignation of Jacob Zuma as the country`s president. The new president will be expected to a make some change to the Cabinet and the state-owned enterprises.
As you will know, markets are not going to move in a straight line, so we suggest you ignore some of the noise in the media. We will always make sure that your portfolios have the correct asset allocation to stocks, bonds, property and cash, both in local and international markets. Proper rational diversification is the best solution to market fluctuations.
Core Wealth Managers have a long-term, valuation-based investment philosophy which positions us well versus short-term thinking, which is mainly influenced by noise in the markets. We focus on managing the risk of capital loss and look to take advantage of opportunities as they arise by buying undervalued assets in an effort to generate real returns for our clients. This has proven to be a winning strategy for the past almost 10 years and we will continue to do that.