Our in-house economic analysis is presented below, this provides a broad outline of market returns from both a local and an offshore perspective.

Transcription

1 Dear Investor 10 January 2015 Quarterly Market Commentary 4 th Quarter 2014 As we enter the first quarter of 2015, the global economy continues to show a few signs of strength and several signs of weakness. The greatest strength appears to be in the US economy, which may finally be on a sustainable and healthy growth path. Europe, on the other hand, continues to struggle, just barely staying above water. In China, the deceleration of growth continues amid growing concerns about the stability of credit markets. Locally, cheaper oil will benefit local businesses and individuals but looming strikes and unstable electricity supply are major concerns. Our in-house economic analysis is presented below, this provides a broad outline of market returns from both a local and an offshore perspective. Quarterly Market Returns in SA Rand for 2014 Index Q1 Q2 Q3 Q S&P 500 Total Return 2,24% 5,27% 6,23% 9,21% 25,57% Nasdaq 100 0,53% 6,00% 9,98% 9,19% 30,27% MSCI Emerging Markets (Net TR) (0,01%) 6,72% 2,00% (1,09%) 8,04% MSCI China (5,47%) 3,37% 6,07% 9,99% 15,59% FTSE/JSE Africa All Share J203T 4,29% 6,43% (3,15%) 2,31% 10,88% FTSE 100 (TR) (0,19%) 5,99% (1,70%) (0,43%) 4,75% Dow Jones Industrial Average (0,30%) 2,53% 6,31% 8,93% 18,76% Alexander Forbes Money Market 1,36% 1,45% 1,50% 1,54% 5,98% ALBI Total Return - Beassa (ALBI) 0,89% 2,89% 2,22% 4,19% 10,15% US: Investors received a variety of signals that the US economy was picking up speed in the second half of Labour market data was especially strong, with payroll statistics reaching their most favourable levels since the late 1990 s. After shrinking in the 1 st quarter, the US economy continued to grow at a fast pace, 3 rd quarter gross domestic product (GDP) was recently revised to an annualised growth rate of 5%, its strongest pace in 11 years, the main reason behind the growth figure is accelerated consumer spending amid rising incomes and falling gasoline / fuel

2 prices. Meanwhile, the US Federal Reserve sent a strong signal that it expects to tighten monetary policy in middle to end However, it said also that it would be patient in judging when to raise interest rates. Eurozone: The Eurozone s recovery has suffered several setbacks. In the 4th quarter the region as a whole stagnated. Its biggest economies either stagnated (France) or contracted slightly (Germany and Italy). Geopolitical tensions in the Ukraine and Russia have weighed heavily on economic sentiment. Apart from the concrete effects of the ECB (European Central Bank), these setbacks demonstrate that the recovery is still highly vulnerable to external influences. Two questions will be decisive for the rest of the year: Firstly, how effective can these monetary policy measures be? And secondly, is Germany s stagnation temporary or a sign that it is ceasing to be the Eurozone s growth engine? After a six year slump, Greece finally came out of recession earlier this month. Greece experienced a remarkable financial recovery in Just two years ago, the country was expected to default and exit the euro, possibly setting off a messy unravelling of the entire Eurozone. Today, after a tough regime of layoffs, wage cuts and reductions in government spending, factories are beginning to hum again. If evidence was needed that the recovery in the Eurozone was far from self-sustaining, the recent actions of the ECB delivered it. The main refinancing rate and the deposit rate have been cut to 0.05% and minus (-) 0.20%, respectively. There were two main reasons behind the ECB s further policy easing. First, the inflation rate in the Eurozone continues to be very low. Second, the ECB intends to overcome stagnation and lasting high unemployment by improving credit conditions, particularly in southern Europe. The continuous easing of monetary policy in the Eurozone has had one main effect so far: it has weakened the Euro, thereby helping Eurozone exports. Brent Crude: Oversupply in the oil market, coupled with weakening demand, have sent oil prices plummeting. Since its peak on June 20 th, the price for Crude has fallen approximately 50% and at the time of writing currently sits at approximately US$45 per barrel. North America s energy boom has dramatically increased supply, aided by surprisingly strong production out of the Middle East and North Africa despite political turmoil in that region. Conversely to supply, demand outlook has weakened, with many economies around the world slowing (China) or in borderline recessions (Japan, Brazil, and much of the Eurozone). The decline was recently made worse by OPEC s decision on the 27 th of November to maintain current production, surprising most industry analysts who expected the cartel to announce a roughly 500 thousand barrel per day production decline. South Africa imports the oil it uses to power vehicles and run diesel electricity generators, so a

3 40% drop in Brent Crude prices since June is a boon to the government, businesses and individuals alike. South Africa: A recession was technically averted in South Africa, but the SA economy remained under pressure in Annualised GDP growth of 0.6% was recorded in the 2nd quarter of 2014, after a contraction of 0.6% in the 1st quarter. Consumer price inflation (CPI) remained under upward pressure, averaging above 6% in the first nine months of 2014, slowing to 5.8% in November 2014 and is expected to subside further in The deficit on South Africa s current account widened much more than expected to 6.2% of gross domestic product (GDP) in the 2nd quarter of 2014 from 4.5% of GDP in the 1st quarter as strikes, weak global demand and declining commodity prices weighed on export growth. The deficit had been expected at 5.6% of GDP. International ratings agency Moody s warned that the large current account deficit poses risks to SA s sovereign credit ratings. Sovereign ratings downgrades imply higher borrowing costs for the SA government, its entities and major private-sector businesses such as banks, the large current account deficit also weighed on the SA Rand. The SA Rand in 2014, experienced its worst year against the US dollar since the peak of the global economic crisis of 2008 and On a purchasing power parity (PPP) basis, the SA Rand remains fundamentally cheap and attractive. But for this to translate into economic reality, we need more robust growth and a sounder economic environment. As we head into 2015, the global economy continues to expand slowly. Although interest rates remain low, there are some indications that rates, at least in North America, could begin to move higher in the coming year, which can be a headwind for fixed-income investments. Nearly 6 years after the financial crisis, equities have delivered generally positive results, however global markets are cyclical, and it s always difficult to predict their direction in any given year. While the sharp drop in oil prices and the broad resource index has weighed on the SA Equity market in particular, it is important to remember that asset classes, industry sectors and geographic markets often move in divergent directions. Lower oil prices, for example, can be positive for other sectors as they strengthen consumer confidence and reduce costs for manufacturers, transportation companies and related industries.

4 Portfolio Review GCI MET Income Fund The Income fund competes in the Income sector, and is the perfect alternative for SA Cash. The fund is managed by Adrian Clayton from Northstar Asset Management and Brandon Quinn from Saffron Wealth. At the moment the fund is positioned on the short to medium end of the yield curve and is positioned perfectly for an interest rate sensitive environment by demonstrating a low duration. The Income fund has a Return Objective of SA CPI + 1% and will protect you against the threat of inflation and provide you with real returns over the short term. The fund had a positive December returning 0.56%. GCI MET Stable FoF The fund returned 2.78% during the 4 th quarter and 6.51% for The fund had a positive December returning 0.74%. The top performing fund was the Prescient Income Provider (9.91% of the portfolio) returning 1.45%. The Stable fund has delivered a 7.52% annualised return since inception, which is well ahead of the 5.98% that SA Money Market would have delivered. The fund has a Return Objective of SA CPI + 2%. The fund is perfect for the investor who is looking for SA CPI + 2% returns over a 2 3 year period. The fund is mandated to hold up to a maximum of 40% in local equity and is Regulation 28 compliant, thus can take advantage of offshore opportunities as they develop to a maximum level of 25% of the portfolio. This added level of diversification will protect investors from excessive volatility. GCI MET Balanced FoF The fund returned 2.46% during the 4 th quarter and 7.51% for The fund had a positive December returning 0.92%. The top performing fund was the GCI Global FoF (USD) (5.80% of the portfolio) returning 1.51% in SA Rand. The Balanced Fund has delivered a 10.05% annualised return since inception (09 September 2005), which is ahead of the SA CPI + 3% Return Objective of 9.31%. The Balanced fund is mandated to a maximum of 60% local equity exposure, 25% offshore exposure and a maximum of 5% exposure to Africa. The fund is perfect for the investor who is looking for a well-diversified medium equity fund with offshore exposure that will benefit from a weakening SA Rand. GCI MET Balanced Plus Fund The Balanced Plus and the Income fund is the newest addition to the GCI Suite of funds, the Balanced Plus fund competes in the High Equity sector, and is the most aggressive option for your

5 pension fund money. The fund is managed by Adrian Clayton from Northstar Asset Management and Gary Quinn from BlueAlpha Asset Management. Even though the fund only launched on 28th July 2014 the fund is already ranked 9 th out of 153 funds measured from inception. The fund had a positive December returning 0.98%. Naspers (2% of the portfolio) was the best performing local share returning 5.66%. The best performing offshore share was Chase Manhattan Corporation (0.92% of the portfolio), returning 11.02% in SA Rand. The Balanced Plus fund has a Return Objective of SA CPI + 4%. With the local JSE All Share Index (J203) trading at P/E Ratio of times earnings, the fund remains extremely well positioned to take advantage of opportunities as they develop. The higher than normal cash position will give us an edge when the market retreats from these high levels. GCI MET Flexible FoF The fund returned 3.51% during the 4 th quarter and 9.30% for The fund had a positive December returning 0.52%. The top performing fund was the PSG Flexible Fund (20.21% of the Portfolio) returning 1.91%. The Flexible Fund has delivered a 10.63% annualised return since inception (23 August 2005). The Flexible Fund has a Return Objective of SA CPI + 5%. The broad nature of the funds mandate means that the fund is very well diversified across equity, bonds, money market and property, with the only limiting factor to the fund being the maximum 25% offshore exposure. GCI MET Worldwide Flexible Fund The fund returned 4.90% during the 4 th quarter and 15.35% for The fund is managed by Adrian Clayton from Northstar Asset Management and Gary Quinn from BlueAlpha Asset Management. The fund had a positive December returning 1.30%. Naspers (2.44% of the portfolio) was the best performing local share returning 5.66%. The best performing offshore share was Chase Manhattan Corporation (1.27% of the portfolio), returning 11.02% in SA Rand. The following shares were purchased during the month: BHP Billiton, Delta Property Fund and Growthpoint. The following shares were sold during the month: Investec and Spar. With the local JSE All Share Index (J203) trading at P/E Ratio of times earnings, the fund remains extremely well positioned to take advantage of opportunities as they develop. The higher than normal cash position will give us an edge when the market retreats from these high levels.

6 GCI Global FoF (USD) The Global Fund is the solution for all your offshore money. The fund returned -3.25% in US$ for the month of December. As a result of a deflationary situation in Europe, weak Chinese growth data and the price for a barrel of oil momentarily falling below US$50 it became evident that the heavily Resource exposed RE:CM Global Fund would take a beating. We took this opportunity to sell out of the fund locking in a profit of 21.34% in US$ terms. Changes in legislation have provided a very good opportunity to rebalance the portfolio early this year. The fund has a Return Objective of US CPI + 4% over a rolling 5 year period. In our view, recent global market events support the case for maintaining a portfolio that is well diversified across asset classes, geographies and industry sectors. Diversification will help to maximize returns for your portfolio, while mitigating risks as they occur, including currency and interest rate movements. By following our investment philosophy we have managed to minimise our clients drawdown over this period and have built in sufficient safety nets to protect our clients wealth over the coming investment periods. As always, we will update you via our GCI Monthly Reports, for more news and interesting information, please connect with GCI Wealth on or follow us on Kind Regards Francois Lombard