Macro review
While 2016-2017 could be described as a global synchronised recovery, 2018 is turning out to be a year of regional divergence. In recent months, US economic surprises and leading indicators have remained strong but have rolled over abroad. Divergence is also evident in corporate profits and interest rate differentials.
During the last three calendar months (Q2 of 2018) the MSCI World (DM) index posted a USD return of 1.9% (versus -1.2% for Q1), outperforming the -7.9% of Emerging markets (EM). Year to date EM posted a loss of 6.5%, while developed markets realised a positive return of just 0.8%.
A protracted slowdown in global growth remains the main fundamental risk, with trade wars and a China slowdown being the most specific challenges.
This could be negative for global growth and EM (we could still see more capitulation). It is a known fact that trade wars have no winners and it is therefore our investment view that a full-blown trade war scenario will not play out. However, the market's willingness to give politicians the benefit of doubt over the past six months might have perversely prolonged the game of chicken. The irony now is that a market correction might be needed to reduce the risk of a trade war, which could be the dynamics of the markets in the weeks to come. The outlook for EM is turning more ‘stagflationary’, in the sense that growth risks have shifted decisively to the downside, while inflation risks are creeping up.
Earlier in the year it was our view that international markets could rally somewhat this year; we are now more cautious as the risk of trade wars rises.
Performance
The MSCI World Index (developed markets) realised a net return of 1.73 % in USD terms for the second quarter of 2018, which was better than the -7.96% of the MSCI Emerging Markets.
Our Feeder fund buys and sells units in a “parent fund” called the Satrix MSCI World Index Fund, which tracks 23 developed countries with more than 1600 shares included in the index. We do the tracking of this index through a process of optimisation with a tracking error ranging between 15 and 18 basis points.
The MSCI World Index (in rand terms) managed a return of about 17.68% (1.73% in USD) over the last three months. This difference in return was mainly due to the rand depreciating by about 15.9 % against the USD over this period.
Conclusion
There are growing concerns that global businesses may be subject to new regulation and be the target of tariffs if a US-China trade war escalates. Political risk is dominating fundamentals and we now have progressed into a new era where central banks are not the back stop supporting financial markets.