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January 2019 Update

Making the News

After a volatile end to 2018, January saw a dramatic improvement in news flow as the US Federal government shutdown ended, Theresa May survived another vote of no confidence, and the US Federal Reserve appeared significantly more dovish with regards to the direction and level of interest rates going forward into 2019. News that the US and China continue to move forward in their trade talks was also positive for global sentiment.

Locally, the news flow seemed to centre around testimony at the Zondo Commission, with the true extent of state capture finally being revealed in great detail. Eskom once again in the headlines for all the wrong reasons, as the damage caused by years of mismanagement, corruption and cadre deployment have left the company struggling to survive, creating a significant financial burden on the South African government’s finances and therefore the South African taxpayer.

Digesting the News

The markets rightfully reacted positively to the news out of the US and continued their recovery that started around Christmas and has seen both Global Equity (+12.7% in USD) and Local Equity (+14.3% in USD) markets move significantly higher. The sharp recovery over the last five weeks highlights the importance of remaining invested during periods of volatility as the penalty for not being invested, even over a five week period, can be severe.

While it is still too early to tell whether the recent recovery in global equity prices is the start of another up-leg in the bull market, or merely a relief rally in a bear market, the combination of a relatively robust global economy, modest US inflation, and attractive global valuations have many money managers (ourselves included), more optimistic about future long-term returns.

In the short-term we continue to expect that more shocking information will come to light around state capture and the corruption that took place over the last decade. While we are appalled at the cost of this corruption, we believe that South Africa is in a better position having this out in the open, with committed civil servants being put in positions of power to deal with those involved.

Markets in the Month

January was a positive month for the major local asset classes as the more dovish stance of the US Fed led to increased risk appetite globally, benefitting Emerging Markets such as South Africa.

SA Listed Property bounced strongly +9.2% in January, recovering some of the losses suffered in 2018. SA Equity went further up (+2.8%) in January, adding to the strong gains generated in December (+4.3%).

SA Bonds benefitted from positive inflows from foreign buyers, ending the month +2.9% up. Bonds have been the best performing major domestic asset class over the last one and three years. This has been a significant recovery following the deep sell-off experienced during Nene-Gate at the end of 2015.

Global Equity performed exceptionally well in January, ending the month up 7.8% in US Dollars. Local investors (who measure their returns in Rands) however would have received a negative return (-0.5%) for the month as the strong recovery in the Rand against the major hard currencies off-set all of those gains.

Impact on Our Portfolios

All of the local strategies were up strongly in January (1.0%-2.5%) benefitting from the strong domestic asset class returns in the month. CWM Retirement Growth was up the most (+2.5%) as higher SA Listed property and Emerging Market Equity exposure drove returns up.

The CWM Income strategy (the most conservatively managed portfolio) lagged the more aggressive portfolios during the month given the limited exposure to SA Equity and Listed Property. However, the strategy benefitted from its high bond exposure which in turn helped the strategy to comfortably outperform cash and money markets during the month.

The CWM Foreign Balanced portfolio fell 2.7% (in Rands), as it was unable to offset the materially strong Rand. The Foreign Equity Houseview funds were up marginally (+0.1% in Rands), managing to outperform the global equity index by 0.6% in the month due to higher Emerging Market exposure.

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

The low return environment over the last five years has placed a premium on the ability to deliver outperformance. On average, the above strategies have delivered 0.7% p.a. more than their respective peer groups over the last five years, with CWM Flexible performing the best on a relative basis, 2% ahead of peers.

With the five major asset classes (from the returns table above) all delivering returns of between 6.8% and 10.5% p.a., there has not been major divergence in returns from any strategy over the period. Other than the Retirement Growth portfolio, all of the local strategies have outpaced inflation, with the CWM Income portfolio delivering the best returns over the period.

Looking Forward

As mentioned above, we are more optimistic about future long-term returns than we have been for a while. This is not due to the strong returns in January filling us with confidence, but rather the attractive valuations of growth assets locally and globally. There are risks in the short-term, both domestically and internationally, but our view is that most of these risks are already adequately reflected in the current share prices.

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 always 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.

December 2018 Update
February 2019 Update