July 2020 Update
Making the News
With most economies hit hard by the Covid-19 pandemic and associated shutdowns, it was no surprise that US GDP declined by 32.9% for the second quarter of 2020.
On the bright side, progress is being made in developing a Covid-19 vaccine as several vaccines have moved into late stage trials during July. This is encouraging news and we will continue to monitor the development of the potential vaccines in the coming months.
In SA, the Monetary Policy Committee cut the repo rate a further 0.25%, to 3.5%, on the back of lower inflation and growth forecasts. In contrast to the unanimous May 0.5% cut, two members voted to keep rates unchanged at the July meeting, with differing views emerging amongst members around the balance of risks to the outlook. On a global scale, interest rates are low and in July, the US Fed mentioned that rates are expected to be kept low for the next two years.
Other news that may be of interest to our readers was that Gold hit an all-time high in July reaching around $2000 per ounce.
Markets in the Month
The US dollar weakened in July as investors started to doubt its long-term safe haven status given the dovish US Federal Reserve. The Rand strengthened by 2.6% against the US dollar but weakened against the Pound and Euro by 4% and 3% respectively.
Emerging market (EM) equities led the way in July, outperforming Developed market equities by 4.1% during the month. GMO, an offshore asset management firm with over 40 years’ experience in the financial services industry, provides monthly updates of expected real returns for asset classes around the world. Since 2018, we have held the view that valuations are attractive in emerging markets and to motivate this, in the latest research update from GMO, the firm expects long-term investors in Emerging markets value strategies to be rewarded with USD real returns of +9.2% over the next 7 years.
As EM edged higher in July, so did South African equities, with the FTSE/JSE All Share Index delivering +2.6% for the month. The underlying sector within the index that drove this performance was the rampant Resources index which returned +8.3%, boosted by strong precious metal prices such as Gold. Additionally, the Industrials index lost -1.2% while the Financial index gained some traction and ended the month up +1.2%.
In the fixed income space, performance across the domestic bond curve was mixed in July, with the shorter end of the curve (out to the ten year point) rallying, but longer dated yields steepened further. As a result, the ALBI returned +0.6% for the month and lifted the year to date index return to +1.0%.
Impact on Our Portfolios
July was another positive month for all our Core Wealth strategies. Our aggressive strategies benefitted the most with CWM Flexible and CWM Retirement Growth ending the month up +2.2% and +2.3% respectively.
5 Year Returns (p.a.) CWM Local Model Portfolios / Foreign Strategies
Local model performance over the last 5 years is mediocre with our most conservative model, CWM Income, delivering the best return of +7.9%. Conversely, on the global side, our foreign house views show a strong track record over this period as Rand weakness has benefitted these strategies. Despite the local models not delivering their intended returns over the period due to very soft equity and listed property markets, we expect to see an improvement in performance over the coming years given the current valuations on equities and listed property.
Future macroeconomic releases, particularly GDP growth rates of countries around the world, are expected to be lacklustre as the impact of Covid-19 begins to reflect in the numbers. While progress has been made on potential vaccines for the virus, this is an iterative process and will take months before a vaccine is officially approved and distributed throughout the world.
From a market perspective, investors sought certainty in the technology growth shares, attracted by their strong reported earnings and obvious benefit from accelerated online commerce. These “Tech” shares have done well in the past but appear priced for perfection currently; assuming that past performance will be replicated going forward.
At an index level, most stock markets around the world have had their performance driven by technology shares but have majority of their underlying stocks trading in bear market territory. For instance in SA, aside from the main technology shares such as Naspers and/or Prosus, approximately 84% of the All Share Index constituents are trading in bear market territory. Similarly, Japan and even the United States have most of their market trading at a discount to their long-term averages. However, since these markets are dominated by Technology shares, the overall index appears overvalued.
These are just three examples of opportunity sets for investors but many other countries display a similar theme where the majority of underlying stocks are undervalued but the overall index appears overvalued. We find this to be a fertile ground for contrarian investors as several shares are out of favour allowing long-term investors to purchase these shares at bargain prices. This effectively improves the odds of long-term success as the bargain price paid gives investors a margin of safety and allows for significant future growth.
This forms part of our process at Core Wealth and we do so by selecting managers that can exploit opportunities as mentioned above. The diversified portfolios we build have allocations to managers which are invested aggressively in technology shares as well as managers invested in value orientated shares, that at present remain unloved by the broad market.
In conclusion, the current uncertainty and volatility creates a trying environment for investors but presents significant long-term opportunities. The managers we invest in have the patience and skill to sift through these opportunities and will continue to find excellent companies at attractive valuations. Long-term returns look compelling and we are confident the market will ultimately reward our patience.