QUARTERLY INVESTMENT VIEW

Transcription

1 QUARTERLY INVESTMENT VIEW The rolling quarter ending September 2018 was yet another volatile period for investors, with SA risk assets once again fading towards the end of the period. Geopolitical events, led largely by the USA (increased trade tensions, coupled with rising interest rates), Europe (softening economic conditions, nationalistic resurgence and Italian self-interest), capital outflows from Emerging Markets and a fading of the Ramaphoria effect (weak SA fundamentals, hamstrung economic policies & political rhetoric in the lead up to general elections in 2019) are all expected to keep capital markets vulnerable to even minor disruptive events and adverse news-flow. The USD is expected to maintain its stronger bias as global capital seeks out relatively higher-yielding and growing safe havens during this period of posturing and retaliation. Table 1: Total return of selected indices (all in ZAR) to 30 September 2018 Qtr % 1 Yr % 2 Yr %* 3 Yr %* 5 Yr %* SA Equity (J203T) SA Property (J253T) SA Bonds (ALBI) SA Preference Shares (J251T) SA Cash (Call Deposit) SA Cons Inflation (CPI) lags 1 month MSCI World NR USD EPRA/NAREIT Property TR USD Citi WGBI USD BofAML USD Libor TR USD US BLS CPI USD lags 1 month * Returns are annualised / Source: Morningstar Direct The FTSE/JSE All Share Index (J203T) fell 2.2% over the quarter, anchored by the returns generated on resource-related counters (Resi10 Index +4.6%) and financials (Fini15 Index +4.2%). Industrial stocks (Indi25 Index -8.2%) dragged the index down, regardless of earnings orientation. SA bonds (ALBI) gained 0.8% during the period, with SA listed property stocks (J253T) 1.0% lower. SA listed preference shares (J251T) returned a positive 2.6% during the period and remain an attractive investment destination with high yields and a relatively attractive

2 margin of safety on offer. SA cash (STeFI) returned 0.5%, rounding off a relatively stable period for domestic fixed income assets. Table 2: ZAR movement against selected currencies to 30 September 2018 Rate Qtr % 1 Yr % 2 Yr %* 3 Yr %* 5 Yr %* USD EUR GBP AUD * Returns are annualised / Source: Iress THE OPERATING ENVIRONMENT DOMESTIC ASSETS Fixed Income & Property SA s broad-based CPI has been relatively well behaved over the past decade, rising by 5.1% per annum during the period. In the shorter-term, we expect that the March 2018 annual CPI reading of 3.8% was a trough that will not be revisited for a while, as the impact of a weaker ZAR and rising administered prices places pressure on local prices. The 4.9% year-on-year CPI reading in August is indicative of the upward price pressures to be expected in Our view as to interest rates is largely unchanged in that we expect rates to remain at current levels through the end of 2018 should the USD/ZAR remain range-bound around current levels. Money markets are pricing in further rate hikes over the next year which we expect to moderate somewhat given disappointing economic growth. With ZAR prospects being largely at the mercy of the US monetary policy, emerging market flows, credit rating downgrades, escalating trade wars, variable commodity prices and uncertain revenue collection points towards the SA Reserve Bank treading carefully. Listed domestic property counters remain in hibernation mode after enduring an awful winter, with companies revising forecasts and distributions lower. Increasing vacancies, oversupply within all sectors, rising operating costs, expropriation concerns and high letting incentives are keeping investors on the side-lines. Despite the sector looking relatively attractive relative to others within the fixed-income universe, the risks within the sector leads us to retain our underweight positioning while selectively adding to existing positions deemed less vulnerable to macro events. Currency The relatively open and liquid ZAR was 2.2% weaker against a stronger USD, with further impetus being provided by the continued withdrawal of USD liquidity and policy missteps in Turkey, Venezuela and Argentina during the quarter. Page 2 of 5 Cordatus Capital Quarterly Comment September 2018

3 Countries with high USD denominated debt have come under pressure and while we expect that periods of USD weakness will provide a breather for the ZAR, our longer-term trend expectation for ZAR weakness is still in place. Rising global bond yields (led by the USA), faltering global stock markets, a SA credit rating downgrade, materially higher oil prices, policy uncertainty ahead of the 2019 general elections, faltering commodity prices and further liquidity constraints from Europe and Japan point to ZAR weakness from current levels as (and if) they materialise. Equity SA-focussed counters (e.g. domestic industrials, domestic property, banks, retailers) having benefitted during periods of ZAR strength, low inflation, improved consumer sentiment and lower interest rates that characterised most of 2016/2017, are finding current conditions challenging. With sentiment and growth waning, a focus on SA listed counters able to produce the required operational efficiencies and introduce additional growth vectors is our core focus. OFFSHORE ASSETS Fixed Income & Property Moderately rising US inflation, low unemployment, robust economic growth and fiscal expansion are supportive of higher US interest rates over the short-term. The narrative and actions around higher US rates remains influential across all asset classes and geographies, with emerging markets displaying high USD external debt profiles feeling the effects more acutely. We remain underweight global bonds, expecting yields to settle at higher levels as part of the US normalisation process. We do however anticipate that yield increases will be contained in due course as Europe maintains the status quo and Japan remains active QE participants. Any change in these factors could see yields moving meaningfully higher and as such the risk attached to the asset class leaves us on the side-lines. Currency With international conditions (trade, rates, liquidity and politics) showing signs of deteriorating, we expect the USD to retain its recent strength as global liquidity retreats, growth uncouples and monetary accommodation fades. We have maintained a USD bias within portfolios in line with expectations around the path of US interest rates and relatively attractive growth outlook for the USA in Page 3 of 5 Cordatus Capital Quarterly Comment September 2018

4 Developed market equities (MSCI World Index) returned 5.0% over the past quarter in USD terms. Emerging markets however fared poorly, with the MSCI EM Index falling 1.1% during the period and MSCI South Africa declining 7.4% in USD. Equity While relatively strong earnings growth, capital being returned to investors and robust economic growth is still expected from developed market equities (primarily the USA) over the next year, policy uncertainty (trade, fiscal & monetary), higher valuations and uncertainty surrounding the longevity of the current economic cycle lead us to position towards a neutral (from overweight) stance on global equity. The pro-cyclical stance we have been maintaining over the past years is being tempered by expectations of changes in current conditions relating to volatility, inflation, real wages, interest rates and capital flows. BUSINESS AT CORDATUS 1. Craig turned 50 during the quarter! Shannon and the kids gave him Art (painting) lessons in the hope of distracting him a little from the current market gyrations! It is working, so if you need Craig between 6pm and 9pm on Wednesday evenings you could be disappointed! 2. Cordatus has completed the migration of all business information to the cloud. The advantages of remote access and the services offered by Microsoft is a huge step-up from our current disaster management protocols and offer increased investor personal information protection 3. Cordatus continues to operate in accordance with all applicable legislation, with Rolfe updating all internal compliance-related processes to align with a raft of new Board Notices out of the FSCA as to fit & proper requirements. 4. Newby Jono is furiously ploughing through all the exams and courses required before being appointed as a Representative under supervision at Cordatus. Jono will also be embarking on the final level (level 3) of the CFA program in 2019 and as such, has a mountain of study material to get through while making great strides at improving the efficiency of our work-flow activities. 5. A warm welcome to all those new investors at Cordatus who become valued clients during the past quarter. All of these clients were referrals from existing clients, which we deem to be the best form of marketing we could ever undertake. If you have yet to refer a new client to Cordatus, there must be a reason! Let us know what we could be doing better for you to become an active fan and promoter of our services at Cordatus. Page 4 of 5 Cordatus Capital Quarterly Comment September 2018

5 6. While the current economic / political environment will likely lead you to hold your head in despair, Cordatus evaluates investment opportunities on a daily basis. The returns that we have generated over the past quarter are expanded upon in the three Fund Reports which detail our actions over the past quarter and thinking as to where we are finding opportunities that align with the appropriate investment time horizon, risk profile and income/growth requirements of individual investors. We take this opportunity to thank you sincerely for the support and trust that you have placed in Cordatus. Managing your wealth is a privilege and a duty we take very seriously. Regards, Craig, Rolfe, Kim & Jonathan Website: Twitter: Facebook: Cordatus Capital DISCLAIMER Cordatus Capital (Pty) Ltd is an authorised Financial Services Provider [FSP # 21263]. The content of this document and any information provided may be of a general nature and may not be based on any analysis of the investment objectives, financial situation or particular needs of the client (as defined in the Financial Advisory Intermediary Services Act). As a result, there may be limitations as to the appropriateness of any information given. It is therefore recommended that the client first obtain the appropriate legal, tax, investment or other professional advice and formulate an appropriate investment strategy that would suit the risk profile of the client prior to acting upon such information and to consider whether any recommendation is appropriate considering the client s own objectives and particular needs. Any opinions, statements and any information made, whether written, oral or implied are expressed in good faith. The products discussed in this document, may or may not, be regulated by the FSCA. Page 5 of 5 Cordatus Capital Quarterly Comment September 2018