July 2018 Update
Making the News
In July we saw an escalation in trade tensions between the US and China, as more details emerged regarding the quantum of tariffs to be imposed by either side. Despite the increased tension between the world’s two largest economies, the relationship between the US and Europe seemed to move in the right direction following a trip to the continent by Donald Trump.
Locally the South African Reserve Bank (SARB) left interest rates unchanged in part due to modest inflation (+4.6% year-on-year), as well as continued low domestic growth and dangerously high unemployment (27.2% in 2Q2018).
On the political front, President Cyril Ramaphosa began collecting investments from the Middle East and fellow BRICS nations, ending the month with USD35bn (or R460bn). This news was however overshadowed by the late-night speech he delivered at the end of the month, announcing the ANC’s plans to support the parliamentary process of land expropriation without compensation (EWC).
Digesting the News
In our view the President didn’t say anything new with regards to EWC or the ANC’s position. Rather than add further speculations to what is already a very noisy topic, we will wait until more concrete plans are released before making an assessment.
However, what we can say is that any infringement on the protection of property ownership rights will be negative for investment (from local and foreign investors), negative for growth, negative for inflation, unemployment, the Rand and most SA facing investments.
The news that President Ramaphosa returned home (from one trip to three countries) with USD35bn in commitments to invest in South Africa is incredible. Unfortunately this great success was also lost on the incessantly pessimistic local media.
South Africa desperately needs investment. The lack of confidence locally has resulted in domestic companies hoarding cash. By generating interest (and resultant capital inflows) from global investors, the President may ignite greater confidence, causing local businesses to deploy that pent-up capital.
If allocated correctly and efficiently, the inflow of capital should also assist with the sky-high unemployment rate of 27.2% (with youth unemployment at 38.8%) that continues to plague South Africa. If South Africa is to truly turn the corner, the government needs to address this immediately by providing policy certainty and making the difficult decisions in every government department that can get South Africans working sooner rather than later.
Markets in the Month
The materially stronger currency was mostly negative for local portfolios measured in Rands as both the Rand Hedge stocks on the JSE dragged the market lower, while the gains (in US Dollars) on Global Equity markets were not enough to overcome the 4.3% strengthening of the Rand versus the greenback.
Inflation (as measured by CPI) remains well within the SARB’s targeted band of 3% to 6% and close to the unofficial target of 4.5%. Despite this figure appearing relatively comfortable, local consumers will argue that prices feel materially more expensive when compared with the same time last year alluding to the low confidence amongst South Africans.
Impact on Our Portfolios
A strong Rand and weak SA Equity market constrained local model portfolio returns in July to between -0.6% to 0.6%. The more defensive CWM Income strategy which holds more SA Cash and Bonds and less foreign asset classes was the best performer during the month, returning 0.6%.
The longer-term strategies with higher SA and Global Equity exposure (CWM Balanced, Retirement Growth, and Flexible) were slightly negative for the month.
Our Global Houseviews, CWM Foreign Balanced and CWM Foreign Equity were down 2.7% and 2.0% respectively, with returns hurt by the stronger Rand.
3 Year Returns (p.a.) CWM Local Model Portfolios / Foreign Strategies
Weak returns from both SA Equity (6.4% p.a.) and SA Listed Property (-0.9% p.a.) over the last three years continue to limit returns from the longer-term focused strategies.
The more defensive strategies (CWM Income and CWM Retirement Income) have benefitted (on a relative basis) from higher exposure to SA Cash (7.3% p.a.) and Bonds (8.3% p.a.). CWM Defensive (4.9% p.a.) is the exception amongst the more conservative strategies as weak relative performance from the underlying managers and a higher allocation to SA Equity have hurt this strategy over the last three years.
Both Foreign Houseviews are ahead of SA inflation over the last three years, benefitting from a reasonable return from global equity markets (10.3% p.a.) and the weaker Rand in 2018 (7% YTD versus the US Dollar).
All six of the above local strategies remain ahead of inflation over the longer-term (since their respective inceptions), and five of six strategies are in the first quartile of their respective peer groups (Retirement Growth is 2nd quartile) since their respective inceptions. While the absolute returns are muted, these peer comparisons are pleasing and demonstrate the value add of having a disciplined and well researched investment process.
It is understandable that investors are more focused on the risks they can see (i.e. EWC, trade wars, and EM contagion) than actively searching out the opportunities that are present as well. This is exaggerated after three to four years of low returns and in an environment of low confidence. This environment makes it difficult for investors to stick to their long-term strategies, and it is far easier for an investor to “park” their money in cash until there is “less risk and more certainty” about the future.
Unfortunately, the future is always uncertain, and the risks we can see are far less risky to our wealth than the risks that we are not thinking about. What makes things more complicated is that the uncertain future is already priced into the market, therefore should the day of a more certain future arrive, it too will be priced in and the opportunity to move out of cash and back into the market will not be a profitable one for any investor.
At present we are spending most of our time making sure that the managers we use are actively looking for attractive opportunities in parts of the market that are unloved or that are deemed too risky by the crowd and are looking cheap on a risk-adjusted basis. Doing this will ensure that our clients’ portfolios are invested in assets with sufficient margin of safety and are well positioned should the uncertain future turnout to be a positive one.