December 2017 Update
Making the News
December 2017 was widely expected to be a volatile month as a consequence of the ANC Elective Conference. The change of leadership in the ANC has been interpreted as good news for South Africa and the local markets, but hard work will still be required. The new ANC leadership has the significant task of trying to undo the damage inflicted on the economy, by corruption, wasteful expenditure and mismanagement at state-owned enterprises such as Eskom.
The other major event that all investors had to deal with was the impact of the Steinhoff debacle.
Digesting the News
The +90% decrease in the Steinhoff share price as a result of what can euphemistically be described as “accounting shenanigans” dragged the local market lower (given the +2% weight in the index). Besides coinciding with heightened market anxiety given the ANC conference, it has also been coupled with about 20% pull-back in the Naspers share price, putting further short-term downward pressure on markets.
For a pure SA Equity portfolio a 2% decrease is material, but not portfolio defining. Given our philosophy of diversifying across asset managers, and never constructing a portfolio with a single asset class, the impact on our client portfolios has been limited. Across all our client portfolios, exposure to Steinhoff shares was limited to 0.9%.
The chart below shows that the range of exposure across our model portfolios was between 0.0% and 1.7%.
Crucially, in the most conservatively managed portfolios (i.e. Regular income strategies: CWM RI Defensive and CWM RI Growth), exposure was limited to between 0.4% and 0.7%.
Steinhoff Equity Exposure Across CWM Model Portfolios
For us the most important objective is to ensure our clients achieve their long-term objectives. We aim to stack the odds in our favour of achieving these objectives by ensuring that each portfolio is constructed:
- taking a Long-Term view,
- using Valuations to determine allocations, and
- with sufficient Diversification.
This has proven to be a robust strategy through many short-term market events and rewarding over the long-term. The Steinhoff debacle is yet another example of why we will continue to manage our client portfolios in this prudent manner.
Markets in the Month
The domestic equity market, as measured by the FTSE/JSE All Share (ALSI), was down (0.3%) in December. Listed Property (SAPY) closed the month 4.2% higher, while the Bond Index (ALBI) outperformed at 5.7%. Overall for 2017, the ALSI outperformed all other domestic assets up 21.0%, (SAPY 17.2%, ALBI 10.5%, and Cash 7.5%).
The Rand ended the month 9.9% firmer against the US dollar, 9.7% stronger against the Pound and 7.7% against the Euro. Gains in the Rand were supported by a revival in sentiment, as investors responded positively to the election of Cyril Ramaphosa as the new ANC president. Rand strength was further supported by an uptick in commodity prices and a weaker dollar.
Impact on Our Portfolios
As a result of currency strength during the month, December was not a very good month for our model portfolios. The range of returns across the local CWM Model portfolios was -4.0% to +1.2% in December, with CWM Income the best performing local strategy. Our Global Houseviews, CWM Foreign Balanced and CWM Foreign Equity were both down -8.1%, due to rand strength.
3 Year Returns (p.a.) CWM Local Model Portfolios / Foreign Strategies
While all portfolios generated wealth by outperforming inflation, the moderate returns delivered by the local equity market and recent Rand strength has resulted in moderate performance over the last 3 years.
The stronger returns from growth assets in the last 6 months has begun lifting the returns of the more aggressive longer-term strategies (CWM Retirement Growth and CWM Flexible) relative to the more conservative strategies (CWM Income and Defensive).
Looking Forward
Cyril Ramaphosa`s victory in the December 2017 ANC presidential race at the ANC National Elective conference meeting was widely welcomed by investors.
While the results of the elective conference could resuscitate the broken consumer and business sentiment, sustainability of higher confidence levels will depend on the ability of the new leadership to rebuild trust between government and the private sector, commit to fiscal discipline and address the governance and financial problems in the SA`s state-owned enterprises.
The extent of the anticipated growth recovery in 2018 and the outlook for SA’s sovereign ratings will depend on whether or not officials will adopt and ratify policies to enhance the country’s creditworthiness.
Core Wealth Managers will continue to take advantage of opportunities presented by these economic and political changes. We do this by investing across different managers and use valuation driven asset allocation in order to deliver real long-term returns.
