September 2017 Update
South African Growth, Inflation & Interest Rates
South Africa’s gross domestic product (GDP) rebounded with +2.5% growth in the second quarter of the year. This was the highest growth rate in a year with much of the growth coming from a strong recovery in agriculture, where good summer rains helped dramatically improve production.
Growth risks remain to the downside given the lack of domestic demand and limited investment due to low confidence levels across consumers and producers. In contrast, the global economy has continued to experience synchronised growth (across regions), with the outlook for emerging markets particularly strong.
Given the stronger domestic growth and modest inflation (latest 4.8%), the Reserve bank left interest rates unchanged, with an eye on protecting against foreign investor outflows.
Digesting the News
The South African Reserve Bank’s (SARB) decision to leave the interest rates unchanged following the 0.25% cut in July was largely unexpected by the market in general. Our internal expectation was more hawkish (i.e. did not expect a rate cut) given the governor’s comments and the possibility of further credit rating downgrades, heightened political noise and the risk to the exchange rate. In this regard, the SARB`s decision was both prudent and rational in our view.
The end of the year is shaping up to be one of the most crucial periods for our country’s future. The current economic situation presents the Minister of Finance with a problem on what to do about the fiscal framework. At the moment, it is hard for the Minister to boost taxes and cut spending, therefore we expect the budget deficit to be above the 3.1% projected in February. The finance minister’s medium-term budget speech at the end of October will be scrutinized by the major rating agencies, as well as local and foreign investors alike.
Unless the government is able to cut spending in absolute terms or increase revenue collection (i.e. improve growth dramatically), there’s very little chance of convincing the rating agencies that South Africa’s fiscal management is still under control. It would be very negative if South Africa were to face further ratings downgrades in November/December.
Finally, the ANC elective conference in December is expected to be a major game changer in the South African politics and economic landscape. From an investor’s standpoint, the ANC needs to reduce the risks facing the country caused by corruption‚ looting and state capture.
In order to do so, a particular calibre of leadership is required. If the right people get elected then the country is expected to begin moving from the slow economic growth environment to recovery. In practice this is expected to be a slow process, however markets may react strongly, potentially front running any particular outcome.
Markets in the Month
The domestic equity markets, as measured by the FTSE/JSE All Share (ALSI), declined by -0.9% in September, but the ALSI was up a healthy +8.9% in the third quarter. The All Bond Index (ALBI) delivered 1.1%, Listed Property (SAPY) 1.2% and Cash gained 0.6% last month all contributing positively to a balanced portfolio’s performance.
Calendar year to date (YTD), the ALSI is up 12.6%, outperforming all other domestic asset classes (SAPY 8.2%, ALBI 7.8%, Cash 5.6%).
The rand depreciated by 3.5% against the US dollar, 7.6% against the Pound and 2.8% against the Euro last month. The rand weakness supported the performance of rand-hedge stocks, while companies with domestic focus were among the worst performers.
Impact on Our Portfolios
September was a good month for our model portfolios despite the ALSI being down -0.9%. The range of returns across the local CWM Model portfolios was +0.8% to +1.6% in September, with CWM Defensive and Long-Term Growth the best performing local strategies. Our global Houseviews, CWM Foreign Balanced and CWM Foreign Equity were up +4.2% and +5.0% respectively, supported strongly by the rand weakness.
3 Year Returns (p.a.) CWM Local Model Portfolios / Foreign Strategies
The chart above shows that other than the foreign houseview funds, the local portfolio (annualised) returns remain range bound (+5.8% to +8.3% p.a.) over the last three years.
The stronger returns from growth assets recently have begun lifting the returns of the longer-term strategies (CWM Retirement Growth and CWM Flexible) relative to the more conservative strategies (CWM Income and Defensive), although remain modest given the modest local equity returns over the three year period (+7.1% p.a.).
Looking Forward
Core Wealth Managers is committed to not losing sight of the long-term goal of maximising risk adjusted returns for our clients. However, we know that these returns do not come in a straight line. There will be periods of ups and downs along the way. As stewards of our clients’ capital, we recognise the consequences of our investment actions, which helps to avoid falling into the trap of taking excessive short-term risk in the hope for a short-term reward.
At Core Wealth we do understand that many forecasted events never materialise, while others happen without being anticipated. In this regard, we use a pragmatic valuation driven approach in our investment process. We actively manage risk and build investment portfolios by incorporating historical data, current market conditions and valuations with limited forecasting. By trying to ensure that the price we pay for an investment incorporates a margin of safety, our investment approach assists in navigating through uncertain times, and plot a course that generates more consistent returns, without trying to predict any specific outcome.
