March 2018 Update

Making the News

March was fairly quiet in terms of news, especially when compared with the events that took place during the preceding three months. Markets continue to digest the Ramaphosa presidency, resulting in mixed results for various asset classes while globally, investors were kept busy analysing the impact of “The Donald’s” tweets, and the potential fallout thereof.

There was some relief for local consumers as the Reserve Bank (SARB) cut interest rates by 0.25%, although this was largely expected.

Digesting the News

Most South African investors (investors who measure their returns in Rands) must be wondering whether things are really getting better after reviewing their portfolio statements at the end of March.

Year-to-date the SA Equity Market (as measured by the FTSE/JSE All Share Index) is down -6.0%, with listed Property down a dramatic -19.6%, not the positive response to the Ramaphosa victory many would have expected. In truth,  the change in President was largely priced in at the end of 2017, at least in terms of positive impact, with a number of “SA Inc. “ stocks in the financial and retail sectors rallying strongly.

The improvement in sentiment can be seen the strength of the Rand, which is 3.9% stronger versus the US Dollar in 2018, and +18.3% since just before the ANC elective conference at the end of 2017. It’s is this strong currency, coupled with an inordinate number of stock specific issues that have dragged SA portfolios lower.

Last month we mentioned a number of these stocks, most notably Naspers which was down a further 11.6% in March. Tiger Brands can now be added to the list of stocks that are down more than 15% in 2018, following the discovery that the source of the Listeriosis outbreak was in fact, their factory in Polokwane.

Not to be outdone, the listed property index remained under pressure, as the drama surrounding the Resilient group of companies (Resilient, Fortress B, NepiRockcastle and Greenbay) is yet to be resolved, with prices down between 40% and 65% in 2018.

All of the above stock and country specific issues, as well as a global market correction that started in January, have left investors with nowhere to hide. The only two asset classes that have added to performance in 2018 are SA cash (+1.8%), and SA Bonds (+8.1%), which obviously do not feature prominently in a long-term portfolio.

Markets in the Month

As mentioned above, only SA Cash and Bonds are positive in 2018, and it was a similar story in March. Global equity is down -5.2% YTD, hurt by the stronger rand. Interestingly, foreign investors in SA assets are grinning from ear-to-ear, as their investments are looking exceptional when measured in USD over the last 6 to 24 months.

Despite the short-term drawdown on both, SA Equity and Listed Property have delivered inflation +11 p.a. over the last fifteen years, and remain the best asset classes for creating long-term wealth.

Impact on Our Portfolios

Model portfolio performance was weak again in March given weak growth asset (SA Equity, Listed Property and Global Equity) markets. The range of returns across the local CWM Model portfolios was -2.7% to +0.8%, with CWM Income performing best during the month given the higher allocation to SA Cash and Bonds.

Our Global Houseviews, CWM Foreign Balanced and CWM Foreign Equity were down -1.9% and -2.9% respectively due to the continued global equity market correction.

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

Local equity has failed to outperform inflation over the last three years, with the Rand strengthening against the USD over the same period. Both a weak equity market and strong Rand have suppressed the returns on all of CWM models, with only the CWM Income, Retirement Income model portfolios and the Foreign Equity Houseviews delivering positive real returns (returns above inflation).

Despite the poor equity markets over the last three years and the resultant poor returns on clients’ investment portfolios, the long-term outperformance of our portfolios show the benefit of keeping a long-term strategy on track. For example, while the CWM Balanced portfolio has only been able to deliver 3.4% over the last year and 5.1% p.a. over the last three years, it has still managed to deliver 9.8% p.a. since it started in November 2012. This is consistent across all of our long-term strategies that have been running from more than four years.

Looking Forward

We would caution long-term investors not to panic when fundamentals are strong (globally) and improving (RSA). Although prices are falling, this often create attractive long-term opportunities to patient investors willing to ride out the short-term bumps during such periods.

While we hold no special insight that allows us the avoid any of the Steinhoffs and Resilients of this world, our philosophy of investing with some margin of safety does limit that damage. Furthermore our strategy of ensuring sufficient diversification across management styles and asset classes result in robust portfolios that weather the unavoidable market storms.

Looking forward, we see sufficient reason for a South Africa investor to be optimistic. Inflation is low, the rand is stronger and there is an undeniable improvement in confidence that should drive domestic growth. It is our job to make sure our clients are well positioned to benefit from these improving conditions and are protected against the risks that are perhaps less obvious.