May 2019 Update
Making the News
The national elections and the announcement of the President’s new cabinet dominated the news in May. Between the cabinet announcement and the swearing in of parliamentary members, reports were released regarding Deputy President David Mabusa and Minister Pravin Gordan by the ANC Integrity Committee and Public Protector respectively.
Globally, the sharp reversal in the direction of trade talks between the US and China created the most headlines, followed closely by President Trump’s decision to ban US firms from working with Chinese firm, Huawei.
Not to be outdone on the global stage, the UK government continued to stumble towards the European Union (EU) exit, with Theresa May announcing her resignation as leader of the Conservative Party and therefore Prime Minister in June.
Digesting the News
As we noted last month, we did not believe there was much value in trying to predict the election results, or in trying to predict the market’s response to the results. This turned out to be the correct stance, as the election results were close to what the market was expecting and therefore should have resulted in a rally, given the greater certainty provided by the strong mandate to President Ramaphosa.
This was unfortunately not the case as markets had their worst month for the year thus far. As is often the case, markets were more impacted by news from outside South Africa, and in particular, the intensified trade threats between the US and China.
That said, President Trump continues to negotiate aggressively (with all parties, not just China), which creates significant volatility in global markets (especially Emerging Markets like South Africa) as investor anxiety increases dramatically. While the most recent steps in the negotiation appear to be pushing these two super-powers further apart, one must remember that less trade globally is negative for all concerned (including the US). With less than 18 months before the US presidential election, it is unlikely that no compromise is reached as President Trump tries to extend his stay at the White House for another four years.
The news that Theresa May will resign in June similarly does not move the UK closer to a “market-friendly” Brexit deal. In our view, her resignation opens the door further to the potential that the UK may leave the EU with no deal in place. Those jockeying to take her place at the head of the government and the negotiating table with Europe, are dominated by more “Hardliner-Brexiteers” more determined to make a name for themselves, and deliver a divorce, by all means necessary.
Markets in the Month
It was very much a ‘risk-off” month globally, as both the SA equity (as measured by the All Share Index – ALSI) and global equity markets (MSCI World) lost -4.8% and -4.5% respectively in May. While this is the first negative calendar month return in 2019, SA and global equity are still up +7.1% and +10.4% year-to-date (YTD) respectively. SA equity remains the best performing major local asset class (YTD), with Bonds now the second-best performer, up +5.3% in 2019.
SA listed property (SAPY) outperformed SA equity during the month, although remains well behind YTD (+3.8% versus +7.1%) and lags SA equity by +7.2% over the last year (ALSI: +2.4% versus SAPY: -4.8%).
In a month when risk assets struggled, SA equity in particular, it is no surprise that safe-haven assets such as Gold stocks attracted cautious investors. The FTSE/JSE Gold Mining Index was up +12.7% during the month, pushing the index’s YTD performance to +39.3%, marginally behind the FTSE/JSE Platinum Mining Index which is up 42.7% so far in 2019. Both of these sub-sectors have comfortably outperformed the aggregate Resource sector YTD (+8.1%), which is the best performing major sector in 2019 thus far (Industrials +7.7%, Financials +5.1%).
The weaker Rand (-3% versus the US Dollar) did little to lift the performance of both the Rand hedge shares on the JSE as well as the performance of global equities during the month. YTD depreciation against all three major currencies remains modest, although over the last twelve months the Rand is significantly weaker, particularly against the US Dollar (-18.2%).
Impact on Our Portfolios
Weak equity market returns (local and global) resulted in negative returns for all local strategies, with the more aggressive portfolios (i.e. portfolios with higher equity and listed property exposure) performing worst.
The CWM Income portfolio was the only local strategy to deliver a positive return in May (+0.6%) given the limited growth asset exposure within this strategy. In a reversal of April, the CWM Flexible and CWM Balanced strategies lagged in May (down -3.8% and -4.6% respectively). Given the longer-term investment horizon for these portfolios (and therefore higher growth asset exposure), it is unsurprising that these strategies struggled during the month. Despite the sharp pull-back in May, both portfolios are still up in 2019, with CWM Flexible (along with CWM Retirement Growth) performing best YTD, both up +3.8%.
The Rand weakness in May (against all three major currencies) resulted in some support for the performance of the Foreign Houseviews (HV), although was not enough to keep returns positive for the month. The Core Wealth Foreign Balanced (-2.3%) and Foreign Equity (-3.8%) Houseviews were both down in May, as weak global equity markets dragged returns lower. YTD performance remains robust, despite the pull-back in May, with Foreign Balanced up +7.4% and Foreign Equity up +11.9% so far in 2019.
5 Year Returns (p.a.) CWM Local Model Portfolios / Foreign Strategies
With SA equity (+5.4% p.a.) and SA listed property (+5.9% p.a.) both delivering less than 1% above inflation (before fees) over the last five years, most SA based investors have endured an extended period of seeing their wealth struggle to grow in real terms. The silver lining over the period has been returns delivered by foreign assets, which have benefitted from the Rand depreciating by 7.2% p.a. against the US Dollar.
We are reasonably satisfied with the performance of the CWM portfolios versus peers over the last five years, despite the modest absolute returns shown above. Only CWM Retirement Growth and CWM Defensive have lagged their respective peer group averages over this period and only CWM Retirement Growth is behind inflation.
All the local strategies are ahead of their peers since their respective inception dates (2012/13), adding on average, an additional +0.7% 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 more than 10 years since their inception.
Political events have dominated the news headlines and driven short-term market movements for a long-period of time. From a South African perspective, it feels as if we (and the markets) have been on a rollercoaster since December 2015 (Nene-gate), offering investors little rest-bite from the whip-lash created from all the sharp (read: wrong) turns taken.
Our view is that our newly elected president and his smaller more competent looking cabinet offer a potentially brighter future for our country. We do not expect that this future will simply be handed to them, and as we have already seen in the month since the elections, the president has as bigger of a task in uniting his own party as he does in fixing the South African economy (we think it is unlikely for him to achieve the latter without achieving the former).
We have mentioned on many occasions previously that it will only take a few small (yet important) steps to see business and consumer confidence return to the local economy which will then lead to much improved investor confidence. We do not expect this to happen overnight and most definitely do not expect this to happen without volatility in the short-term.
Regular readers will know that we never position our portfolios for any single outcome and try to avoid where possible, investing for comfort and security in the short-term. We prefer to focus on the long-term, positioning portfolios in assets where prices are attractive, offering investors the chance to grow their wealth above inflation if they have the patience and discipline to ignore the short-term noise.