September 2019 Update

Making the News

The monetary stance of the US remained dovish in September as the FOMC committee cut interest rates by 25 basis points, in line with expectations.

Locally, the decision from the SARB was unanimous to leave interest rates unchanged. Furthermore, the pressure is on the government to expedite structural economic reforms postulated by the Finance Ministry. That said, we are hopeful that a plan will be further discussed in the medium-term budget speech scheduled to take place on 30^th October 2019 following Tito Mboweni’s proposed economic policy document released in September.

Elsewhere, Middle Eastern and energy markets were shocked by an attack on Saudi Arabia’s oil facilities, causing a mid-month spike in the oil price. Prices have subsequently settled as production levels were rapidly restored, amidst weakening global oil demand.

Digesting the News

There has been a difference of opinions between the members of the FOMC committee due to continued uncertainty regarding the US China trade war and how US inflation will move going forward. Three members of the ten member policy committee voted against the 0.25% cut (two votes were to leave rates unchanged and one vote to cut rates by 50 basis points). This level of dissension reflects the widespread market uncertainty about what to expect from the US and indeed the global economy, which resulted in lower bond yields as global risk appetite continued to wane.

In SA, the Reserve Bank (SARB) kept rates unchanged at its September meeting, much in-line with expectations and despite lacklustre growth expectations. SARB Governor Lesetja Kganyago suggested that another cut is unlikely to happen this year despite the SARB’s statement appearing more dovish than the previous one.

On the political front, President Cyril Ramaphosa faced multiple challenges during the month as xenophobic attacks and gender-based violence dominated the news headlines and overshadowed the World Economic Forum which was held in Cape Town. Despite this, our Finance Minister Tito Mboweni released a surprise proposed economic policy document entitled “Economic Transformation, Inclusive Growth, and Competitiveness: Towards an Economic Strategy for South Africa”, which included several politically controversial recommendations such as selling off Eskom assets to stabilise government finances and reforming government departments.

Markets in the Month

The Rand was mixed during the month against major currencies but largely flat as a result of global risk off sentiment. For 2019 so far and over the last year, the Rand is weaker against all major currencies, given the ongoing geopolitical tensions that largely affect our local currency and emerging market currencies as a whole.

SA Equity (measured by the All Share Index) ended the month +0.2%. In September, the strong return from Financials (+3.5%) was dragged down by the Industrials (-0.7%) and Resource (-1.1%) sectors. Despite the negative return from Resources in the month, this sector still remains the strongest driver for the year so far (up +13% YTD), and as a result, the SA Equity market remains comfortably ahead of inflation (up +7.1% in 2019). Conversely, the YTD returns from Global Equities (+24%) have been significantly stronger following the recovery in US shares that account for more than half of the global market. These returns however, as mentioned above, are unlikely to be the same going forward as a potential global slowdown dampens future return expectations.

The returns from SA Listed property was similar to what was generated from SA equities during the month, although remains comfortably behind SA Equity over the last 1 to 3 years. The recent sell-off due to concerns around how these companies will sustain their dividend pay-outs given the difficult domestic environment have pushed valuations to levels materially more attractive than what was seen during the global financial crisis, more than a decade ago.

SA Bonds (+0.5%) and Cash (+0.6%) were the best performers in September and have both provided robust returns during a volatile year. Going into October, given the update from Moodys to leave South Africa’s credit rating outlook as stable, much focus will be on the medium term budget speech with particular emphasis on how the debt of SOEs will be managed going forward.

Impact on Our Portfolios

Despite the modest returns generated from our local asset classes, September was a positive month for all our local models with the best performer being the CWM Flexible Fund which delivered +1.7%. A strong driver of the performance in the month was the PSG Flexible fund which returned +3.1%. The fund benefitted from the strong performance of its top two holdings: Old Mutual and Glencore which were up +8.7% and +7.5% respectively, which also helped drive returns from other PSG funds used across the other CWM model portfolios.

The following PSG funds are included in the CWM models listed below:

Given the above information, it is not surprising that the more aggressive portfolios followed suit evidenced by the returns from CWM Retirement Growth and CWM Balanced of +1.4% and +1.3% respectively. Post retirement models such as CWM RI-Growth and RI-Defensive also benefitted from this exposure coupled with overall good returns from the other underlying funds with the exception of the property allocation.

5 Year Returns (p.a.) CWM Local Model Portfolios / Foreign Strategies

Our models have delivered reasonable performance over the last five years given the weak returns from local growth assets of [Equity (+5.3% p.a.) and Property (+3.2% p.a.)] and have largely delivered returns in line with peers. Relative to inflation however, returns are below our long-term expectation for these strategies.

In our long-term strategies such as CWM Retirement Growth and CWM Flexible such short to medium periods of weaker performance is expected due to the naturally volatile nature of higher growth asset (equity and listed property) exposure. It is important to understand that even more conservatively managed strategies, such as the CWM Defensive portfolio will deliver returns around (i.e. above or below) its stated target over shorter-term periods.

The bar chart below illustrates the calendar year return cycle and the range of the returns possible from a portfolio with 50% invested in growth assets, both for the CWM portfolio specifically, as well as for the average fund managed to a similar risk-return target.

After the lower returns from 2016 to date, it is easy to forget the 2013 to 2015 period when returns were higher in absolute terms and relative performance (compared to peers) was very good. However, the longer term nature of investing in growth assets and the unpredictability of when returns occur, requires us to ride through these periods of lower returns in order to benefit when returns improve.  We can take comfort from the fact that through time growth assets provide more periods of good positive returns.

Looking Forward

Rather than getting swept away by the negative news flow which has been pervasive recently, we are more interested in determining whether actions taken this far to correct the direction of the South African economy will produce positive outcomes. Small green shoots are beginning to appear as those implicated in state capture are brought to book. Additionally, another indicator that the economy could already be on a better path can be seen in South Africa moving up 8 places in the World Economic Forum’s global competitive rankings in President Cyril Ramaphosa’s first year in charge.

We are aware that much more needs to be done in order for our country to thrive as it once did and we believe that there is potential for this to happen. We expect South Africa’s investment rating to remain safe for another 12 to 18 months giving President Cyril Ramaphosa’s government time to implement economic reforms, including fixing the loss-making power utility Eskom. Importantly, even if a rating’s downgrade to Junk status in November was to occur, much of this is already in the price (i.e. reflected in the value of the Rand, government bonds, rating on SA facing business listed on the JSE and listed property shares).

During times of heightened market volatility, people often use the excuse of an uncertain future event as a reason not to be invested. In reality, the future is always uncertain and the outcome is seldom as bad as the most pessimistic outlook, and never quite as good as the most optimistic prediction – it usually lies somewhere in between.

Our experience has taught us to position client portfolios in such a way in which it is able to endure the pessimistic scenario and thrive in the optimistic outcome. We do this by always constructing diversified portfolios, using managers that are focused on fundamentals rather than sentiment, and by always taking a long-term view. This philosophy doesn’t always produce the best outcome over the short-term, but has most definitely assisted in stacking the odds of long-term investing success in our clients’ favour over the last ten years.