June 2018 Update

Making the News

Bad news sells. And it appears that Donald Trump is determined to do anything to ensure he is in the headlines, at-all-times and at-any-cost.

Global investors should be enjoying the fact that the US economy (and in fact the global economy) is the most robust it has been in over a decade. However, the US President is severely undermining investor confidence by aggressively following his isolationist policies. The most recent of which, has likely started a trade war between the world’s two largest economies (USA and China), which has the potential to slam the global economy into reverse.

On the domestic front, most of the news (after the shock 1^st Quarter GDP figures announced in the beginning of June) was political in nature. Much like Mr Trump, our local politicians are doing little to lift investor sentiment, with most of the angst surrounding the handling of three key policies:

• Land Expropriation without Compensation
• National Health Insurance, and
• The revamped Mining Charter

Digesting the News

The deteriorating economic relationship between the US and China is a real concern. While much of Donald Trump’s grandstanding can usually be classified as noise with regards to actual impact on financial markets, the impact of new tariffs will have a very real impact on businesses in both the US and China.

It is too early to tell how far both sides will be willing to go, and therefore too early to know who exactly the winners will be (if any) and who will be the losers. But what we can say with some certainty is that consumers are likely to bear the brunt (read cost), while investors are guaranteed a bumpier ride.

Domestically, the new leadership are torn between two objectives;

1) As Government: Fix the damage done to the South African economy, SOEs and institutions after 10 years of mismanagement and maladministration, and

2) As the ANC: Ensure re-election in 2019.

In our view trying to achieve these objectives at the same time will require President Ramaphosa to walk a tight rope with zero margin of safety.

The South African economy requires fundamental and structural changes, that will require the political will to push through unpopular policies. This is diametrically opposed to the populist policies that politicians so easily flog the year before an election that promises, “A better life for all!” – no strings attached.

In our view, it is still too early to decide if the new leadership will be successful in achieving both (or either) objectives, but fortunately for us as long-term investors it appears that certain SA facing local asset classes are starting to reflect this uncertainty and risk (i.e. starting to look cheaper and therefore more attractive).

While we are not advocating 100% exposure to local assets in any of our portfolios, the improvement in valuations could result in attractive long-term returns for patient investors willing to sit through the bumps as South Africa works its way back from the brink over the next few years.

Markets in the Month

Emerging market asset classes are not enjoying the trade war tensions, with Emerging Market Equity lagging Developed Market Equity by 4.4% in June, and by 7.9% so far in 2018.

As an Emerging Market, SA asset classes were not immune to this risk-off trade in June, with selling in both the fixed income markets (SA Bonds -1.2%) and Growth Asset markets (Listed Property -3.5%) taking its toll.

SA Equity managed to post a positive return of 2.8%, although most of this return can be attributed to a single stock, Naspers which was up 15.2% in the month. Other Rand hedge stocks also lifted the FTSE/JSE All Share Index, with SA facing sectors, such as Financials struggling (-2.8%).

Inflation has continued to edge higher, largely driven by the weaker Rand (-11.8% vs the US Dollar in 2018) and a higher oil price. While CPI remains within the SARB’s targeted band of 3% to 6% over the last year, and all meaningful periods, further upward pressure increases the chances of interest rate hike sooner rather than later.

Impact on Our Portfolios

A depreciating Rand and positive SA Equity market resulted in the model portfolios performing well in June. The range of returns across the local CWM Model portfolios was 0.5% from CWM Income to 2.7% from CWM Balanced. CWM Retirement Growth, Flexible and RI-Growth all delivered 2.2% growth for the month, with CWM Defensive returning 1.8%.

Our Global Houseviews, CWM Foreign Balanced and CWM Foreign Equity were up 7.8% and 8.5% respectively, with returns helped materially by the weaker Rand.

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

Weak returns from both SA Equity and Listed Property over the last three years continue to drag returns from the longer-term focused strategies down. While all the strategies are still ahead of inflation over three years, only CWM Income is above its long-term return objectives over this period.

More defensive strategies (CWM Income and CWM Retirement Income) have benefitted (on a relative basis) from higher exposure to SA Cash and Bonds, therefore it is unsurprising that returns from these strategies are slightly higher (8.6% and 6.8% respectively).

Both Foreign Houseviews have comfortably exceeded SA inflation over the last three years, benefitting from a strong global equity market (12.7%) and the weaker Rand more recently.

All six of the above local strategies remain ahead of inflation over the longer-term, and five of six strategies are in the first quartile of their respective peer groups (Retirement Growth is 2^nd quartile) since their respective inceptions.

Looking Forward

The increased uncertainty globally and the waning of Ramaphoria locally is testing the patience of even the most fundamentally focused investors. Investors and the public expected more immediate results from the change in political leadership in 2018, and we have very little to show for all the expectations thus far.

As human beings, we feel the same sense of urgency that our clients feel, wanting things to not only get better, but to feel better. We know that investors have endured three to four years of mediocre market returns, with only whiplash from the volatility to show for their troubles. We also appreciate that it may feel like enough is enough, and we must try something different to relieve the tension.

As fundamentally driven investors however, we will stop short of acting on this natural impulse to do something. We will rather continue to implement our investment process in the same methodical manner, allowing valuations combined with an objective assessment of the risks present to determine the most prudent way to allocate the capital under our stewardship. Despite the short-term volatility, we take comfort from the fact that a disciplined long-term strategy will stack the odds of success in our clients’ favour.