MARKET & FUND COMMENTARY 02.2014 During a volatile quarter ending February 2014, the JSE All Share Index rose by 5.5%, with large caps outperforming small caps by a wide margin. Resources (RESI20) rose 12.7%, industrials (INDI25) rose 4.2% and financials (FINI15) recovered strongly during February to end the quarter up 3.5%. Globally, equities recovered from the losses in January, with the MSCI World Equity Index (US$) rising 3.4% while the Global Government Bond Index (US$) rose 1.3% during the quarter. With SA yields having risen over the past quarter as foreign flows reversed and the SARB raised interest rates, yield retracement was evident in the latter part of the quarter. During the past quarter, the All Bond Index returned 0.2%, with the SA Listed Property Index falling -1.8% despite a good month in January. The Rand depreciated by 6% against the USD during the quarter, while declining 8.1% against the GBP as jitters surrounding emerging markets (specifically China) were reinforced by the unstable political situation in the Ukraine. SA CPI increased by 5.8% in January on a year ago with wages, fuel, ZAR weakness and electricity prices expected to push inflation through the upper CPI target band in the year ahead. Table 1: Total return of selected SA indices to 28 February 2014 Quarter 1 Year 3 Years 5 Years 10 Years SA Equity 5.5 22.8 17.1 24.1 19.2 Top 40 6.6 24.9 17.1 24.2 18.8 Small Caps 2.4 22.7 20.6 24.2 22.7 Resources 10 12.3 16.8 1.3 13.3 13.1 Industrial 25 4.2 33.3 30.9 33.9 25.3 Financial 15 3.5 17.6 21.7 26.4 17.7 SA Property -1.8-0.3 18.1 19.1 22.8 SA Bonds 0.2-1.0 8.7 8.6 8.9 SA Prefs 0.3 1.1 5.3 8.3 - SA Cash 1.2 4.7 5.0 5.7 7.1 Rand / US Dollar 6.0 19.1 15.0 1.3 4.9 Rand / Euro 7.4 25.9 15.6 3.3 6.0 Rand / GB Pound 8.1 31.5 16.7 4.8 3.8 Source: I-Net Bridge & Cordatus Capital A combination of building domestic inflationary pressures and the longer-term trend of rising real rates globally is expected to force the SARB to continue raising rates in the short-term, despite their desire to remain accommodative in the face of slowing growth. In addition, domestic equity valuations, elections and foreign perception as to policy and labour stability in SA are expected to keep risk at elevated levels.
While some ZAR stability in the short-term is likely, we expect the ZAR to have a weakening bias for the foreseeable future and when coupled with relatively more attractive valuations to be found internationally, we retain material offshore exposure within segregated client portfolios and the unit trust funds we manage, as appropriate. Our view of the global financial complex over the next decade is still firmly in place. Namely, that equity and property exposure is preferred, with longer-dated Government bonds and cash, our least favoured asset classes. Capital flows remain critical (continued inflows are a precondition for the ZAR to stabilise, never mind recover) to the prospects for emerging market currencies and assets, with SA being particularly vulnerable (despite recent good news) in this regard given the budget & current account deficits we currently run. Importantly, we see inflows as a lagging indicator which reflects emerging market sentiment, not a driver of sentiment. Locally, economic growth has moderated as consumers face tighter credit conditions, household debt levels become elevated and confidence has weakened due to the impact of industrial action and the recent hike in interest rates. We expect SA real GDP growth of between 2% and 3% over the next couple of years on the back of recovery in the primary and manufacturing sectors, which while encouraging, is insufficient in our opinion to deal effectively with the employment, unrest and deficit problems we face. SA needs to grow! Table 2: Returns on Cordatus Portfolios ending 28 February 2014 Month Quarter 6 Months 1 Year 2 Years (ann) 3 Years (ann) Cordatus SA Equity Portfolio 4.2 3.6 11.6 21.2 18.9 18.0 3 Laws Climate Change Equity Pres Fund 1.1 0.3 5.7 n/a n/a n/a Benchmark [1] 4.9 5.5 13.6 22.8 21.1 17.1 Cordatus Global Equity Portfolio [GBP] 2.9 0.1 6.8 8.9 n/a n/a Benchmark [2] GBP 3.1 1.0 6.4 10.8 n/a n/a Prescient Wealth Balanced FoF A1 2.0 4.2 10.3 22.1 n/a n/a Benchmark [3] 3.4 4.3 10.8 18.0 n/a n/a Prescient Wealth Income FoF A1 0.8 1.8 5.0 8.2 n/a n/a Benchmark [4] 0.6 1.7 3.4 6.8 n/a n/a Cordatus Worldwide Flexible Pres FoF A1 1.8 4.2 10.8 n/a n/a n/a Benchmark [5] 1.5 3.4 5.5 n/a n/a n/a Cordatus Worldwide Flexible Pres Fund A1 0.9 4.5 13.2 n/a n/a n/a Benchmark [5] 1.5 3.4 5.5 n/a n/a n/a A current fact sheet for each of the above portfolios is available at www.cordatus.co.za\downloads. Returns for periods longer than 1 Year are annualised. The Equity and Global Equity Portfolios are segregated mandates run according to specific client income, risk and return objectives. Benchmark [1] = 100% All Share Index TR, Benchmark [2] = 100% MSCI World Index TR [GBP], Benchmark [3] = 50% JSE ALSI + 25% ALBI + 15% MSCI + 10% SA Cash TR, Benchmark [4] = 100% SA Cash Index + 2%. Benchmark [5] = CPI + 5% Page 2 of 6 Cordatus Capital Monthly Investment View February 2014
Table 3: Broad Asset Allocation of Cordatus Portfolios ending 28 February 2014 Manager CORDATUS CORDATUS CORDATUS CORDATUS CORDATUS CORDATUS Portfolio Global Equity SA Equity WW Flex Fund WW Flex FoF PWM Bal FoF PWM Inc FoF Currency GBP ZAR ZAR ZAR ZAR ZAR South Africa 0 96 45 69 79 92 Equity 0 86 38 46 47 6 Property 0 5 0 1 4 5 Bonds 0 0 0 7 14 44 Cash 0 5 5 15 14 37 Other 0 0 2 0 0 0 Offshore 100 4 55 31 21 8 Equity 84 4 51 24 19 3 Property 5 0 0 3 0 1 Bonds 0 0 0 1 1 1 Cash 11 0 4 1 1 3 Other 0 0 0 2 0 0 CHARTS & GRAPHS WE FIND INTERESTING AT THE MOMENT GRAPH 1: SA interest rates have been raised in response to ZAR weakness and actions by Central Bankers facing a similar situation. CPI is expected to breach 6% towards the middle of 2014 before gradually declining. ZAR levels the wildcard, foreign flows vital. GRAPH 2: The pressure on the SA SARB is not expected to abate for quite some time. While the Fed is happy (for now) to progress at a steady rate around tapering, what happens when the tapering is finished? Raise interest rates of course! The competitive landscape faced by SA is likely to be around for some time to come. SA rates will have to rise for global Page 3 of 6 Cordatus Capital Monthly Investment View February 2014
investors to remain interested. We need interested investors to help finance our infrastructure plans, so the trend looks pretty well set into 2016. GRAPH 3: Forget about personal tax rates and changes to medical credits, the price of petrol is what matters most for the average South African and many a business. The petrol price is set to rise by 36c/l in March, with a bonus 20c/l increase announced in the Budget for April, to fund the RAF and general levies. The total taxes on fuel now amount to 332,5c/l!! Page 4 of 6 Cordatus Capital Monthly Investment View February 2014
GRAPH 4: Foreign capital inflows in 2012 were always a worry should the Fed begin tapering and/or SA fall out of favour (with or without other emerging markets). Looks like the chickens have come home to roost! GRAPH 5: Flows a problem within equities as well after the massive re-rating in Industrial stocks in 2013, coupled with capital flows. Encouraged by positive flows in February 2014. Page 5 of 6 Cordatus Capital Monthly Investment View February 2014
Being cognisant of the risk, return and investor profile of individual mandates, we would remind investors who have entrusted Cordatus with their long-term wealth management requirements that performance (see page 1) over the next decade is unlikely to match that of the past 10 years! The price you pay for any asset is important and our portfolios (as shown in Table 3) reflect our view on relative valuations, reversionary trades and the need for protection. Local cash levels have been raised slightly during the past quarter into domestic equity strength, reflecting our concerns around domestic valuations. 2014/5 TAX GUIDES In our Investment News section we include the latest tax tables, courtesy of Momentum and a summary version highlighting taxation of retirement lump sums, courtesy of Allan Gray. Regards, The Cordatus Team Craig, Rolfe, Kim and Arthur DISCLAIMER Cordatus Capital (Pty) Ltd is an authorised Financial Services Provider [FSP # 21263]. The content of this presentation 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 presentation, may or may not, be regulated by the FSB. Page 6 of 6 Cordatus Capital Monthly Investment View February 2014