Notes from my inbox - July 2018
“I have walked that long road to freedom. I have tried not to falter; I have made missteps along the way. But I have discovered the secret that after climbing a great hill, one only finds that there are many more hills to climb. I have taken a moment here to rest, to steal a view of the glorious vista that surrounds me, to look back on the distance I have come. But I can only rest for a moment, for with freedom comes responsibilities, and I dare not linger, for my long walk is not ended.”
– Nelson Rolihlahla Mandela
As we celebrate Nelson Mandela’s centenary, his legacy of principled but inclusive perseverance in the quest to achieve a fair and free society should resonate with all South Africans. It is easy to become despondent when expectations are not met, especially in this ‘post-truth’ era where the flow of information is often dominated by demagogues and charlatans attempting to manipulate the narrative for their own benefit. While we should always be realistic about the many challenges still to overcome, we are more likely to make progress if all those with a contribution to make remain committed to enhancing the common ground that is so necessary as a foundation for a society with forward momentum. It is only if we can get most of our people to believe that economic growth will benefit them too that government will feel confident enough to adopt the policies supporting individual freedom which are required to grow the wealth of our nation. While we recognise that the structural reforms needed to kick-start growth will be tough to implement, we remain cautiously optimistic that enough goodwill remains to be able to travel a little further down the road.
QUARTER IN REVIEW
The second quarter saw a sea change in sentiment. The first-quarter domestic rally rapidly reversed as emerging markets everywhere came under pressure. The rand lost 14% of its value relative to the dollar, resulting in the JSE declining by 12% in dollar terms so far this year. Some perspective is provided by even more extreme moves elsewhere. The dollar gained against all major currencies and South African shares performed better than Chinese and Brazilian markets, while the real pain was felt in Turkey (-31%) and Argentina (-44%). A relatively strong US economy, higher US bond yields, an expectation of further policy rate hikes in the US and Europe, and the Trump government’s trade wars combined to generate enough bad news to spook investors. Our economist Marie Antelme and our guest writer Barry Eichengreen provide some insight into why global investors have become more concerned.
Sentiment towards SA deteriorated after first-quarter growth surprised on the downside, and as investors became increasingly unsettled by ongoing policy uncertainty, especially in the areas of land reform and property rights, government’s intended reform of healthcare funding and the ongoing woes at any number of undercapitalised and productivity-challenged state-owned companies (especially Eskom). One small silver lining was the acceptance of “once empowered, always empowered” in the new mining charter draft, reducing the risk of ongoing dilution of ownership for equity holders in existing mines. Unfortunately, requirements for new mining rights as well as for the renewal of existing mining rights are relatively onerous and will increase investment hurdles for new projects. All these factors have the potential to dampen economic growth. However, investors need to remind themselves that we are in an election year – while louder rhetoric is guaranteed, it is likely that the desire to do much more than kick the can down the road is limited.
Taken together, the above caused local bond yields to surge as foreigners offloaded R65 billion of government bonds over the quarter, similar to the levels of outflows during 2013’s ‘taper tantrum’ and 2015’s Nenegate. While many challenges remain, the size of the reaction means that our government bonds now trade at more attractive levels, as explained by Nishan Maharaj. We have used the opportunity to increase bond exposure from a very underweight position.
We also sold out of Steinhoff across our fund range. In the detailed review of events at the company published in January, we indicated that we do not think it would be in clients’ best interests to act while in an information vacuum. It has subsequently become clear, with the recent company disclosures, that the extent of the overstatement of historical profitability is closer to our worst-case scenario at the time. This has led to continued write downs of various Steinhoff assets, and our view is that there is now a high probability of there being no equity value once Steinhoff repays its creditors and settles legal claims. We will take legal action on behalf of clients against Steinhoff, and to the extent legally possible against any other parties that were complicit in wrongdoing. We will continue to provide progress updates as events unfold.
Most of our funds had a reasonable quarter, with our flagship multi-asset funds all returning around 4%. Rand weakness boosted the returns produced by our global funds, with Global Opportunities Equity returning 19% over the quarter. You can read more about your fund’s performance in SA flagship fund range, or via the fact sheets and portfolio manager commentaries available on www.coronation.com.
As always, valuation remains our beacon in turbulent times and we have used the volatile price environment to build positions in some attractively priced shares.
To make it easier for new investors to start their journey of building a balance sheet, we are experimenting with a new investment channel with no minimum investment amount and an application form that can be completed in a couple of minutes from your phone. To celebrate savings month and our 25th birthday, we are also offering a top-up of up to R250 to all new account holders investing during July. Have a look at www.becauseitsyourmoney.com.
We have recently extended the range of funds that are eligible as holdings in tax-free investments, both directly from Coronation and via all the major fund platforms. The new funds now available are Global Opportunities Equity, Balanced Plus, Capital Plus and Balanced Defensive.
Enjoy the read and please do let us know if there is any area where you think we can do better.