August 2021 Update

Making the News

Ongoing Chinese regulations continued to hinder technological companies and those companies seeking to exploit education and healthcare in the middle class. The effect of these policy changes trickled down into the commodity sector where restrictions on steel exports weighed on the surging iron ore price, bringing it closer to sustainable levels.

The Jackson Hole Economic Symposium took place in August where US policymakers convene to discuss economic issues, implications, and policy options pertaining to the symposium topic. At this year’s event, the discussion seemed to have revolved around pushing bond yields lower, indicating that interest rate hikes are only expected many years from now. The bond market has been complacent in this regard, buying into the “lower for longer” interest rates narrative even though a slowdown in the bond purchasing program (i.e., “tapering”) is expected to start close to the end of the year.

On the domestic front, vaccine rollouts have sped up and the third wave has peaked. Additionally, there has been an upward revision of between 9.1% and 11% for South Africa’s (SA) GDP estimates over the years 2011 to 2020. The estimate for 2020 GDP is now R5.52 trillion, 11% larger than the earlier estimate of R4.97 trillion. Adjusting for inflation, the real estimates now show that the economy shrunk by 6.4% in 2020, still dismal, but 0.6 percentage points better than the 7% contraction previously reported.

Market Commentary

Naspers, one of the largest shares on the Johannesburg stock exchange, has been negatively impacted by the policy changes in China and as a result lost a further 12% of value in August. This dragged the FTSE/JSE All-Share Index, a proxy for SA equities, down by -1.7% in the month. To remove the high weighting effect that Naspers has on SA equities, one can refer to the performance of the FTSE/JSE Capped SWIX, which limits each share to a particular percentage exposure. This index delivered a positive return for the month of +2.2% which shows that other domestic shares performed well during the month.

SA Listed Property delivered stella performance in August ending the month up +7.5%. An upward revision to the SA GDP 2020 figure and effective progress made on the vaccine rollout has contributed to the strong performance. SA Bonds furthermore also benefitted by the positive data in the country. With GDP being larger than what was previously assessed means that the country’s debt to GDP level is as a result lower, which is an indication of better solvency. Other positives for the bond market are a surging trade surplus, falling inflation prints and the markets complacency regarding global interest rates staying low until 2023.

Over the last year, SA property (+51%), SA equity (+25.2%), SA Bonds (+14.8%) and Developed Market (DM) equities (+10.8%) delivered robust returns, strongly above SA inflation (+4.6%). SA cash (+3.8%) and Emerging Market (EM) equities (+3.4%) on the other hand has struggled in this regard. Returns over the last 10 years however remains strong for equities with DM (+20.6%), EM (+12.7%) and SA (+11.4%) all delivering double digit figures.

Impact on Our Portfolios

August month has benefitted the CWM model portfolios, especially those portfolios with a high weighting to SA listed property (i.e., Balanced and the Regular Income portfolios). As can be seen in the August column above, CWM Balanced, RI-Growth and RI-Defensive have outperformed their peer groups the most by +0.7%, +1.4% and +0.7% respectively. Additionally, the table above also highlights the robust one-year returns across the CWM local models.

Although the 5-year returns above are mediocre, the returns since inception are encouraging and shows the outperformance of our local models from CWM Income to CWM Flexible. The -0.1% underperformance for the CWM regular income models has largely been a function of the SA listed property exposure introduced to the portfolio to enhance its yield offering.

Looking Forward

There are two key takeaways for investors after listening to/reading the Fed Chair, Jerome Powell’s speech at the Jackson Hole symposium. Firstly, the talks of inflation being transitory continues to remain intact as evidenced by the sharp surge in durable goods orders that has put upward pressure on prices (i.e., autos, semi-conductors, industrial goods, etc.) which have been affected by the squeezed supply chains. Historically, durable goods numbers inflation tends to be negative because of the downward pressure exerted by improving technology and production techniques and therefore the belief is that inflation will broadly be temporary.

Secondly, taper and interest rates were a focal point in his speech. In terms of taper reducing quantitative easing (QE), Powell indicated that the progress on inflation and unemployment has broadly been met. The announcements of definitive dates for tapering are expected in September with the program probably beginning in December. Importantly for markets, Powell said that these will not be the same indicators he uses for interest rates as much more progress is needed on maximum employment goals. Therefore, interest rate hikes are expected only in 2023 which is supportive for global markets.

Furthermore, during the final weeks of August, more clarity was provided on Chairman Xi’s common prosperity goals in China that have negatively impacted sectors in the country, particularly technology and education. As a result, the economy struggled as industrial production faded, retail sales fell, and manufacturing and service surveys of the composite Purchasing Manager Index (PMI) ended being weaker than expected. The PMI number is currently at 48.9 which is below 50 and is therefore contractionary. Over the long-term however, this becomes less of a concern for markets as the regulations on technology companies revolve around three factors: namely, Capital, User Data and Algorithms. Having regulations on these factors makes sense from an ESG perspective, with emphasis on ‘social’ and can provide an attractive opportunity for investors willing to stomach the volatility over the short term.

To conclude, it is important to highlight the tailwinds that the South African economy has or will experience in the months to come. Domestic GDP numbers have been rebased, and the economy is 11% larger than previously calculated. This will likely result in a debt-to-GDP number at around 71% at the time of the Medium-Term Budget Policy Statement (MTBPS), which is expected to take place on 2 November. In addition, State owned enterprises on the other hand are expected to be managed more effectively with self-generation taking pressure off Eskom and the private sector getting involved with Transnet recently.

Overall, we remain confident regarding the Core Wealth model portfolios diversified positioning and expect future returns to be better than the returns experienced over the past five years.