March 2019 Update
Making the News
The news in March was dominated by the two weeks of stage four load-shedding, as Eskom once again brought the South African economy to a stand-still.
Anxious investors waited until the last business day of the month to hear whether South Africa had managed to hold onto its last investment grade rating. Despite the mess created by the rolling black-outs, Moody’s left the South Africa credit rating one notch above junk status with a stable outlook indicating that they would wait until after the elections to make any further comment.
President Ramaphosa was pulled further into the BOSASA scandal as it emerged that his son had benefitted from a business deal with the firm. This comes just six weeks before the election as political parities begin ramping up their rhetoric as to why they deserve your vote.
Globally, it appeared that China and the US continued to move towards a resolution of trade talks, while Donald Trump received good news regarding the allegations that he colluded with Russia during the US election.
British politicians continued to make little headway (other than extending the deadline for a decision to be made by another two weeks) in finding the right Brexit deal. This despite Prime Minister Theresa May’s offer to resign to get the deal over the line.
The South Africa Reserve Bank left interest rates unchanged given that inflation remains comfortably within the targeted band and due to the weak economic conditions locally.
A new (permanent) SARS commissioner was appointed during the month, as the turnaround at key state entities continued.
Digesting the News
It is painstakingly clear that Eskom is not only the largest risk to the South African fiscus, due to the massive amount of debt on its balance sheet, but as seen in March, also the biggest risk to South African economic growth as it struggles to keep the power on. In our view, fixing Eskom (and other SOEs) must be right at the top of the government’s to-do list, and it is our hope that there is the political will to take the decisions needed to right the ship.
As mentioned above, the major political parties have begun gearing up for the election in May, therefore it is unlikely that any of these tough decisions will be forth-coming in April as we have seen in politics globally, it is often “Party Before the People”.
The decision to leave interest rates unchanged was not unexpected given the low growth – low inflationary environment we find ourselves in. Unfortunately, the recent load-shedding (and expectation for further loads-shedding over the coming months) has resulted in the forecasted (GDP) growth figures being adjusted lower, just as these projections were beginning to improve.
The appointment of a highly qualified and experienced head of SARS was welcomed by most, but was also questioned by those who may have benefitted from the continued lack of efficiency at SARS. It is imperative that SARS be returned to its former status along side Treasury as a world class institution if South Africa is to see its financial situation improve.
The decision by Moody’s to not make changes to our credit rating must be seen as a final chance to avoid a downgrade to junk status and should not be squandered as the road to recovery will be made infinitely harder if SA were downgraded.
Markets in the Month
The SA Equity Market (as measured by the All Share Index – ALSI) deliver 1.6% in March, ending the first quarter of 2019 up 8.0%. This is comfortably the best performing major local asset class with Resources (+17.9%) leading the way year-to-date (YTD). Investors who capitulated and headed for cash in December/January would have missed this exceptional bounce and are now faced with the impossible task of figuring out the “right time” to get back into the market.
The market was lifted higher in March by some of the big Rand hedge shares (Naspers +9.4%, BAT +8.7%, ABInBev +10.6%) as well as some of the diversified miners (Anglo +5.6%, Glencore +6.1%, BHP +8.8%). SA Inc shares came under pressure during the month (which can be seen in the -4.8% return from Financials and -1.5% from the Listed Property sector) as local growth concerns weighed down investor appetite for these assets.
The struggles of the listed property sector continued in March as concerns regarding the local economy and the potential for a downgrade softened the outlook for this asset class. Despite valuations in the sector appearing attractive, the risks present represent an important input that must be taken into account when comparing the attractiveness of this asset class versus other growth assets.
SA Bonds held up relatively well in March (+1.3%) despite the concerns surrounding the SA economy and the risks of a downgrade. YTD Bonds have returned +3.8% ahead of both Listed Property (+1.5%) and Cash (+1.8%). Bonds have now delivered +6.7% over the last six months, a strong recovery following the Emerging Market sell-off that we saw in the first nine months of 2018.
Global markets have been strong so far in 2019, with Global Equity up +12.8% and Emerging Market Equity up 10.2%. This has only been helped slightly by a weaker Rand (-1.3% vs the USD), however has mainly been driven by the recovery started at the end of December 2018. Global Property has been the best performing major global asset class in 2019, delivering +15.3% YTD, which has pushed the one-year return to +36.8%.
Impact on Our Portfolios
As was the case in February, a strong equity market coupled with Rand weakness resulted in positive returns across all local strategies, with the more aggressive portfolios (i.e. portfolios with higher Equity exposure) performing best.
The CWM Flexible and Retirement Growth strategies performed best during the month (both up 1.2%) benefitting from higher Equity exposure (both Local and Foreign Equity). Both strategies are also the best performers YTD, up between 5.4% and 5.6% again benefitting from strong equity markets (Local and Foreign), and despite significant SA Listed Property exposure in the case of CWM Retirement Growth.
The more moderately profiled strategies (CWM Defensive, Balanced and RI Growth) delivered between 0.5% and 0.8% during the month, with YTD performance up between 2.8% and 4.3%. This is slightly behind the more aggressive strategies in part due to lower Equity exposure as well as due to higher SA Listed Property exposure, which has struggled YTD.
The Rand weakness coupled with higher Global Equity returns drove the foreign Houseview (HV) funds higher during March. The Foreign Equity HV delivered 4.6%, while the Foreign Balanced HV returned 3.6% during the month. The performance in March pushed the YTD returns up to +13.5% and +8.5% respectively. While the Emerging Market exposure within both the local strategies and the Foreign Houseviews acted as a drag on performance in the first nine months of 2018, a strong rebound in these assets over the last four months have lifted returns. These assets also appear attractively priced and therefore are expected to provide a significant lift to future long-term returns.
5 Year Returns (p.a.) CWM Local Model Portfolios / Foreign Strategies
In an environment where SA Equity (+6.5% p.a.) and SA Listed Property (+5.6% p.a.) have struggled for more than five years, the ability for South Africans invested locally to outperform inflation (5.1% p.a.) has been limited. 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 aver this period.
All of the local strategies are ahead of their peers since their respective inception dates (2012/13), adding on average, an additional 0.9% p.a. above the peer group average. 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 1.4% p.a. over the more 10 years since their inception.
Time will tell whether the upwards move we have seen in Global Equity markets since the end of 2018 is sustainable and a continuation of the long-term bull market we have been in since 2009 or merely a short-term rally in a new bear market that started in 2018. While it would be great to know the answer to this question and whether the Proteas will finally win the World Cup this year, it is not possible to know either of these in advance with any great certainty.
Rather than trying to predict the future, we aim to position our portfolios in such a way that they are robust enough to withstand the worst possible future outcome, as well as participate in any upside should the future turn-out to be better than expected. As we have over the last 10 years, we aim to do this by consistently focusing on the:
- Long-Term: Which means accepting the good with the bad in the short-term,
- Valuations: Making sure we are positioned in assets with superior future long-term returns
- Diversification: Across various asset managers, strategies and asset classes.
History and our track-record show that focusing on these principles and managing client portfolios with the singular focus of achieving their objectives consistently stacks the odds of success in their favour.