November 2019 Update

Making the News

November has been a good month for offshore markets when priced in hard currency given the improvements in trade relations, stimulus added to the Chinese economy, and signs of the Brexit situation moving towards a more positive outcome.

Locally, we have seen SAA strikes and our country’s outlook being downgraded to negative in the news and positive developments of legal action being taken against some involved in corruption. Also the risk-on backdrop seen in the global markets helped support the Rand during month, which ended up appreciating against all major currencies.

Digesting the News

Despite the ongoing battle between the US and China which heavily influences market performance, there has been encouraging data during the month. Sentiment was boosted by improving US economic data, supportive commentary from the US Federal Reserve’s October Meeting minutes, and an unexpected bank rate cut in China, adding stimulus to that economy. Furthermore, the UK and Brexit situation seemed to be moving towards a more positive outcome as the Conservative Party polled strongly ahead of the upcoming UK parliamentary election. Subsequent to month end the Conservative Party won the election.

In South Africa economic and political news in November was marred by industrial action at SAA as workers decided to strike between 15 to 22 November. The strike costed the airline an estimated R50 million a day. Subsequent to month end SAA was placed under business rescue – something we view as positive for sorting out State Owned Entities.

Markets in the Month

The Rand appreciated strongly against the USD (-2.6%), GBP (-3.0%) and the EUR (-4.1%) in the month despite the changed sovereign outlook. Over the longer-term, the Rand is weaker against all major currencies and still provides a buffer for our portfolios with offshore exposure in the event of local economic upheaval, especially the portfolios with a high weighting to Rand hedge shares.

Global Equities has been flat during the month given the rand strengthening while the Emerging Market (EM) basket of shares has lost -2.9% in Rand terms. SA Equities followed the trend of its EM counterparts however not as severely, ending the month down 1.8%. The one year return for our equity market is comfortably in the double digits (up 13.1%) and importantly ahead of inflation by 9.4%. This performance has been driven strongly by Resources throughout the year.

Local bonds were subdued during the month and posted a return of +0.2% making the one year return now +9%. South African bonds were under pressure this year due to the negative outlook from rating agencies, and the uncertainties regarding the country’s fiscal woes. Going forward, we believe that a downgrade to junk status is now imminent given the current difficulty of turning Eskom around.

Despite this negative news, we believe that this pessimism is factored into the price of our Bonds as they are trading at cheap levels and at higher yields than those bonds trading in Brazil which have been already downgraded to junk status.

Impact on Our Portfolios

As seen in the table above November was a lacklustre month from an asset class perspective.

Despite the soft returns in November, our models have done well throughout the year given the better local growth asset performance seen during the year. Positively, all our CWM models have outperformed inflation in 2019 so far and our best performing strategy has been CWM Flexible (up +9.3% YTD).

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

Our foreign houseviews still dominate performance over the longer-term given the strong global equity markets and the depreciation of the Rand relative to USD, GBP, and EUR over the last 5 years. For our local models, we remain focused on our long-term philosophy and at current high bond yields and low equity prices we expect prospective returns to be well in excess of inflation going forward.

Looking Forward

2019 has been a tough year economically however at an asset class level, the overall local market (Equities, Property, Bonds and Cash) has done well in comparison to the performance experienced in 2018 when Equity and Property ended the year down -8.5% and -25.2% respectively.

In context, 2019’s strong performance versus 2018’s poor returns reinforces the view of staying invested over the long-term. An example of the detriment of not sticking to your long-term strategy would be investors who became too negative at the end of last year and decided to sell their assets would have locked in losses, whereas investors who remained disciplined would have been rewarded in 2019.

Once again, we never build portfolios by putting all our eggs into one basket (i.e. one asset class) as this is not prudent investing and will not allow our clients to reach their long-term goals. Therefore, building well-diversified portfolios with an appropriate allocation to various asset classes, depending on the client’s risk profile, will ensure that our clients grow their wealth over their investment horizon.

To all our clients across South Africa and farther afield, we hope you have a wonderful festive season and a prosperous New Year! We look forward to seeing you in 2020.