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April 2018 Update

Making the News

April was a good month for investors who measure their returns in Rands. In a reversal of the first three months of 2018, April saw a sharp recovery in South African growth assets (equity and listed property), as well as foreign assets classes due to a weaker local currency.

April was a quiet month in terms of domestic news, with the new political leadership continuing to work towards improving governance and delivery across government and importantly State Owned Enterprises (SOEs).

Outside of South Africa, the global economy continues to power ahead driven by a very strong US economy. The US Dollar recovered some losses against most other currencies in April on the expectation that interest rates will continue to rise.

Oil prices continue to firm due to supply concerns in Iran and Venezuela, coupled with demand driven by the strong global economy.

Digesting the News

The recovery in the SA Equity market was driven by a combination of the:

  1. Weaker Rand which pushed rand hedges higher (Richemont +11.4%, Mondi +13.0%),
  2. Recovery in Naspers (+5.8%, also a Rand hedge),
  3. Stronger global economy (Sasol +11.1%, BHP +13.1% and Anglo American +7.2%), and
  4. The Old Mutual (+9.0%) unbundling.

The listed property index benefited from a recovery in the beaten down Resilient group of companies (Resilient +35.5%, NepiRockcastle +19.6% and Fortress B +46.2%). How sustainable this recover is only time will tell.

Markets in the Month

As mentioned above, most asset class returns were strongly positive in April. Most notable was the +7.7% delivered by SA listed property on the back of the recovery in the Resilient companies. Despite the strength of the rebound, SA Listed Property remains -13.4% in 2018, and -0.5% over the last year.

SA Equity was not far behind delivering +5.4% in April, now only slightly negative (-0.9%) in 2018.

As can be expected in a month when the Rand weakens by 4.7% against the US Dollar, Global Equity (+6.4%) was up strongly when measured in Rands.

Longer-term investors will still be looking at modest returns over the last three years as both SA Equity and Listed Property have failed to delivered returns above inflation.  Over this period, the Rand is only 1.6% weaker against the US Dollar, which would only provide a modest tailwind to foreign asset class returns, putting further downward pressure on a local investor’s portfolio.

Impact on Our Portfolios

Model portfolio performance was strong in April given big gains in domestic  growth assets (SA Equity and Listed Property). The range of returns across the local CWM Model portfolios was 0.8% from CWM Income to 4.0% from CWM Flexible which also benefited from the weaker Rand.

Our Global Houseviews, CWM Foreign Balanced and CWM Foreign Equity were up strongly 5.6% and 5.2% respectively due to the materially weaker Rand.

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

With low returns from SA Equity and Listed Property over the last three years, the performance from the CWM local model portfolios have been modest, with the exception of the Income strategy, which has delivered inflation +3.2% p.a., benefiting from a strong bond market.

Despite the low absolute returns, all CWM local strategies (except Defensive) have outperformed their respective peer groups over the period. Crucially investors who are more sensitive to short-term returns below inflation (i.e. retirees drawing a regular income), were 1.1% p.a. ahead of inflation over the period.

All of the above local strategies remain ahead of inflation over the longer-term, and five of six strategies are in the first quartile of their respective peer groups (Retirement Growth is 2nd quartile) since their respective inceptions.

Looking Forward

Investors may be wondering if the positive political changes and ensuing improvement in both consumer and producer confidence will ultimately result in positive investment outcomes after a lacklustre start to 2018.

We would caution investors not to become overly pessimistic about the lack of growth asset (equity and property) performance in the short time period since Cyril Ramaphosa was elected president of both the ANC and the country.

There is much to be done to remove the corrupt and incompetent, as well as fix the broken and inefficient. This task will take time and is likely to be met with resistance from some, causing further angst and anxiety.

In the short-term we believe that there is likely to be higher volatility in local assets, but ultimately patient investors who are willing to ride this out, will be rewarded with inflation beating returns over the longer-term.

It is impossible to try and predict these turning-points in the market, therefore we would advocate that investors stick to their long-term strategies and ignore the short-term noise.

March 2018 Update
May 2018 Update