Macro review
In the US, equities began 2018 strongly, buoyed by ongoing strength in economic
data, robust earnings and the confirmation of a major tax reform package. US
business confidence reached an unexpected, multi-decade high in March, while
GDP for Q4 2017 was revised upwards to show growth of 2.9%. The latter part of
the quarter, however, saw a marked increase in volatility as investors first digested
the destabilising potential of an elevated US inflation reading and the possibility that
the Fed may need to become more proactive in raising interest rates, as well as
escalating US-China trade sanctions, which precipitated a renewed bout of
turbulence in March.
In the Eurozone, the economic backdrop remained encouraging over the three
months. GDP growth for Q4 2017 was confirmed at 0.6% quarter-on-quarter.
Unemployment was stable at 8.6% in January 2018. However, forward-looking
surveys painted a picture of slower future growth. The composite PMI hit a 14-month
low in March, albeit the reading of 55.3 still implies solid growth. European Central
Bank chairman Mario Draghi reiterated that interest rates would not rise until well
past the end of the quantitative easing programme. On the political front, the key
event of the quarter was Italy’s election, which yielded no overall winner. Germany
formed a new government after its inconclusive elections in September 2017.
Angela Merkel remains as chancellor after her centre-right CDU/CSU agreed
another grand coalition with the centre-left SPD.
Emerging markets saw positive returns in the first quarter despite a rise in market
volatility stemming from tensions over global trade. Brazil former president Luiz
Inácio Lula da Silva saw his criminal conviction upheld, while in Russia the central
bank cut interest rates and the country’s debt was upgraded to investment grade by
ratings agency S&P. In China, macroeconomic data remained broadly stable, albeit
there were ongoing signs of a gradual slowing in momentum, with official PMI
easing to 50.3. By contrast, there was concern in India over a reported fraud case at
a state-owned bank.
Global and local market review
Global equity markets declined in Q1 2018 with investors unnerved first by concerns
about the path of US interest rate rises and then worries over trade. US equities
began the year strongly, boosted by tax reforms, but ended the quarter lower amid
concerns over inflation and the impact of US-China trade sanctions. Following a
10% correction from its January highs and rallying back 8% by early March, the S&P
500 Index suffered another 5% pullback in the last few weeks, ending the month of
March down 2.5% and losing 0.8% over the last three months, which was the first
negative quarter since the third quarter of 2015. Eurozone equities posted negative
returns as worries over US rates and trade affected other markets. Italy’s election
was inconclusive but had limited impact on the equity market.
Emerging market equities outperformed, delivering a positive return in US dollars.
The MSCI Emerging Markets Index was up +1.5% (total returns) in Q1 2018, ahead
of the MSCI World (Developed Market) Index, which was down 1.2% - the first
quarterly loss in two years. Over the last three months the FTSE/JSE All Share
Index posted a total return of -6.0%. This has been its worst quarterly performance
in eight years (Q2 2010: -8.2%). SA Industrials were the worst performer, returning -
in eight years (Q2 2010: -8.2%). SA Industrials were the worst performer, returning -
8.0% (Naspers and Tiger Brands were both down 12%). SA Resources lost 3.8%
(rising global uncertainty) and SA Financials lost 3.6%.
Of the equity sectors, the top first-quarter performance came from Non-life
Insurance (+24.4%), Fixed Line Telecoms (+10.0%) and General Retailers (+9.2%).
The worst performance came from Real Estate Development and Services (-31.2%),
Software (-30.5%) and Household Goods (-29.0%).
Portfolio performance, attribution and strategy
After a fantastic performance during the 2016 calendar year, Value measures have
experienced a disparate 2017 and start to 2018. The divergence between deep
value measures (e.g. price-to-book) and yield measures (e.g. dividend yield) has
been substantial, with the former struggling, and the latter continuing to perform well
as investors seek defensive qualities during a period of high levels of uncertainty
and flight to safety.
The impact of the news in December regarding the accounting irregularity at
Steinhoff still has investors on edge, with further speculation surrounding Capitec
and technology shares continuing to weigh on market sentiment. Further to these
stock-specific issues, global forward macro momentum has slowed, which has
largely favoured defensive shares with high dividend yields, in particular domesticorientated
shares, of which the Stable Dividend strategy has significant exposure to.
During Q1 2018, exposure to Foschini (TFG), Nedbank (NED), Truworths (TRU) and
Telkom (TKG) played a strong positive role here, while an underweight position in
Naspers (NPN) added a significant amount of excess return. Holdings in Exxaro
(EXX), African Rainbow Minerals (ARI) and Kumba Iron Ore (KIO) detracted from
the index’s relative performance.
In terms of changes to the FTSE/JSE Dividend Plus Index over the prior quarter,
Coronation (CML), Glencore (GLN) and MMI Holdings (MMI) were additions in
March, while Bidvest (BID), Mr Price (MRP) and Sibanye Gold (SGL) were
deletions.