August 2020 Update
Making the News
Globally, Covid-19 infection rates have slowed in most countries. The United States still has the highest number of confirmed cases, but it seems to have tapered off from its peak in July. India is currently the country with the second most infections, and unlike most other countries, seem to have not yet reached their peak.
Volatility is high in the US currently and this is expected to remain high for the remainder of the year given the elections scheduled to take place on 3 November 2020 and the continued uncertainty surrounding the US-China tensions.
On the local front, news of further corruption allegations surrounding the fight against COVID, as well as Eskom power shortages continue to dominate the headlines keeping South African taxpayers negative about the country’s prospects. The silver lining is that lockdown restrictions have now been eased, and the country has moved to level 2. This is a big positive for South African businesses and will importantly lead to a recovery in GDP growth going forward.
Markets in the Month
The US Dollar lost value in July and August as the recovery in world growth continued. US Covid-19 cases remain high and the probability of a Democratic victory currently seems to be the consensus at the polls. As the dollar weakened over the past months, we have seen a strengthening in the Rand. While the strengthening has been welcomed by SA Inc. stocks, the Rand remains highly undervalued against the Dollar as evidenced by its 18.8% depreciation experienced year-to-date (YTD).
In August, global equity markets were the place to be invested to capture the highest gain of +6.1% despite the weakness of the dollar. With technology shares at the forefront of winners during the global pandemic, it is no surprise that the Nasdaq index gained +10.6% in August. Conversely, SA Equities ended the month broadly unchanged, with the JSE All Share Index down -0.3%. The market was dragged lower by the financial sector which lost -6.7% on the back of poor earnings updates. Importantly, the last three months have led to +10.2% performance from the South African equity market and if one had been invested over the last ten years, the money invested would have returned +10.7% per annum (or +5.6% ahead of inflation).
Local Bonds returned +0.9% for the month, lifting its one-year return to +4.2%. As mentioned in previous wrap ups, South African government bond yields remain attractive at just over 9%. With expectations of a further rate cut being announced later this year, investors would have to go further out on the yield curve to generate returns above inflation going forward.
Lastly, August has further exaggerated the losses experienced in the SA listed property (SAPY) sector. The SAPY ended the month down -8.6% pushing its YTD performance to -44.7%. Several large local property counters lost value during the month which has led to the negative performance at an overall index level. The larger property counters like Growthpoint and Redefine were down between -8.1% and -22.3% in July. We feel listed property has been oversold and therefore current valuations are attractive for long-term investors willing to take on the uncertainty in the short-term. The expected return from a revision to intrinsic value and the very attractive (normalised) dividend yields on offer, combine to make the asset class attractive relative to local bonds. Including listed property in an overall portfolio provides the benefit of diversification, assists with additional income generation, and allows for strong growth over the long-term.
Impact on Our Portfolios
Despite the negative returns from local growth assets at an index level, the Core Wealth models delivered positive returns in August. The CWM models have benefited both from offshore performance as well as the value bias theme throughout the models.
5 Year Returns (p.a.) CWM Local Model Portfolios / Foreign Strategies
To illustrate and quantify the performance attribution from the value managers used within our models, we look at two underlying managers in our model portfolios, namely PSG and Bridge (who currently manages the Nedgroup Property fund).
If one looks at the Nedgroup Property fund, for instance, the fund delivered -3.2% in August which represents an outperformance relative to the SA listed property market of +5.4%. The significant deviation from the fund’s benchmark can be attributed to its large exposure to smaller property counters. The current property fund blend across our models are between Sesfikile (quality benchmark cognisant) and Nedgroup Property (small cap benchmark agnostic). This split paid off during August and over the longer-term.
Additionally, PSG Flexible (which we hold across various models ranging from CWM RI-Defensive to CWM Retirement Growth) delivered +4.5% in August. This was ahead of most funds in its peer group and has importantly been ahead of the SA equity market by +4.8%. PSG has a contrarian-based investment philosophy which they apply across their fund offerings. This allows them to buy assets which at present are unloved by the broader market with the assessment that these assets have been oversold. Over the short-term, this philosophy usually detracts from performance within an overall model portfolio but has proven to improve performance significantly over the longer-term.
At the time of writing, StatsSA has released the GDP print for quarter two which was down 17% compared to Q1 in 2020. The anaemic number was expected given the lockdown that was at its most stringent level during the second quarter of 2020. Importantly, the number is already discounted into the prices of most South African assets (particularly SA Inc. shares and SA listed property counters) thereby allowing prospective investors to have a margin of safety when buying into these assets now. Although asset prices are cheap, it is not as simple as merely buying assets at these levels but more about managing a portfolio of various asset classes. Therefore, stock selection in such an environment requires the skills of professional active managers like the curated group included in the CWM models.
Despite the global pandemic still affecting the daily lives of people, we have noticed a sharp recovery in economies around the world. Purchasing Manager Index (PMI) has surprised on the upside and the MSCI ACWI (a barometer of equity markets around the world) has reached record highs even during this unprecedented time of the Covid-19 pandemic. This tells us that markets are no longer pricing in the fears of Covid-19 going forward and that the world appears to have stabilised at the “new normal”. Additionally, there have been positive developments with Moderna, AstraZeneca/Oxford, Johnson & Johnson and Pfizer/BioNtech with potential vaccines for the virus.
To end off, aside from the Core Wealth value bias applied across our model range, we also have a strong position in emerging markets as discussed briefly in last month’s monthly wrap up. With the world starting to grow again, specifically China, which has been ahead of the countries in their recovery, we expect to start to seeing improved returns from EM asset classes in future. Interest rates are expected to remain low for the next two years which, coupled with a weaker dollar, has historically been supportive of a global economic recovery over the medium term which we expect will support emerging markets delivering handsome returns for long-term investors.