The reality of 2022 is in stark contrast to the high expectations for the global economy at the start of the year. The outlook was for a promising recovery in global growth as the world exited pandemic restrictions. Expectations were for a more normalised supply chain environment and a recovery in the service sector that would help build on the strong post-Covid GDP rebound we saw in 2021. However, these prospects were rapidly re-set as we moved into the second quarter of 2022 (Q2-22), driven by a polycrisis marked by the spread of the Omicron variant in China, which triggered lockdowns and disruptions across the country; Russia’s invasion of Ukraine and the ensuing sanctions; the war-induced surge in commodity prices, which impacted inflation expectations; and the resultant faster trajectory for normalising interest rates and policy tightening from central banks.
With the anchor of low, steady interest rates on asset class pricing removed, almost all major asset classes posted substantial losses in Q2-22. South African (SA) asset classes, although cheap to begin with, fared better than global asset classes, but did not manage to escape the carnage completely. The FTSE/JSE All Share Index delivered -11.7% for the quarter (its worst quarterly return in 20 years) and the All Bond Index delivered -3.7%. These sharp, negative moves in domestic asset classes, together with a rising inflation benchmark, has meant that the Strategy’s quarterly return was down approximately 5% but the Strategy still generated an above inflation return over the past 12 months. Importantly, the Strategy has achieved material real returns over longer time periods.
The Strategy’s performance as at 30 June 2022 is shown below:
Over the last year, good equity and bond selection contributed positively to the Strategy’s performance. Within SA equity, positive contributions have come from British American Tobacco, Anglo American, FirstRand, RMI and Shoprite. The last three shares in particular highlight the opportunity for quality, domestic businesses to deliver good returns for investors despite a tough domestic macro-economic outlook.
In the quarter, the largest contributor to performance was our large position in Naspers/Prosus combined, as positive action from Naspers to address the large discount it trades at has been implemented. The share ended the quarter up 36%. At their March results (which were released mid-June), Naspers noted the desire to focus on profitability in the rump assets and the crystallization of value here, on top of growing net asset value per share on a go forward basis. The kicker was the announcement of their intention to implement an open-ended buyback programme, funded by orderly selling down their Tencent stake. This is a course of action we actively pushed at both the executive and board level. Given the vast discounts Naspers/Prosus trade at, the outcome of the above is that shareholders will increase their Tencent shareholding on a per Naspers/Prosus share basis. This is a very positive step and has been the primary driver of subsequent share price performance. We continue to believe that Naspers/Prosus are attractively valued versus their underlying assets and look forward to further developments in realising this value.
From a fixed income perspective, SA government bonds still trade at historically high yields and are elevated compared to their emerging market counterparts. SA has benefited from a significant terms of trade boost that provides more breathing room for the fiscus. The SARB will be under pressure to normalise rates at a pace similar to that of major global central banks, but the current premium in bond yields remains excessive and yields have a significant risk buffer to absorb higher local inflation and higher US bond yields. Our local bond weighting (approximately 40%) has remained steady, with our selection providing healthy real yields for the Strategy.
Our top 10 holdings as at 30 June 2022 are shown below:
The events in the first half of the year proved that the future is difficult to predict, and we expect that the uncertainty and volatility we have seen so far in 2022 will continue to be a feature for the rest of the year. However, based on our return expectations for the various asset classes at our disposal, we continue to believe that the Strategy remains well positioned to deliver on its investment target in the medium term.