Market overview

The last quarter of 2018 was down sharply, resulting in markets being deep in the red for the calendar year. In stark contrast, the first quarter of 2019 has been the complete opposite, recovering almost all that was lost in the previous quarter. The MSCI World Index closed the quarter 12.5% higher in dollar terms. The S&P500 finished the quarter up 13.1%, its strongest quarter since mid-2009 and its best first quarter performance since 1998. Emerging markets (EM) were also up strongly, gaining 9.9%, but continued to lag developed markets (DM) counterparts. The risk on party is back and the complimentary bar is open, for now.

The positives from trade talks and the tone of the US Fed outweighed market concerns that inverted bond yields suggest the US economy may be heading toward a recession, earnings expectations have started to slow and increased wage growth is eating into profitability. Notwithstanding the rally, these concerns have some basis. European equities bucked the global trend as they retreated 0.8% in US dollar terms, on the back of a broad economic slowdown in the region. The European Central Bank picked up on the slowdown and pledged more support for the economy, committing to keep rates unchanged this year and to add more stimulus should it be needed. This, however, sounds like a Deja vu of Mario Draghi’s ’whatever it takes’ statement in 2012.

Portfolio review

The STANLIB Multi-Manager Global Equity Feeder Fund returned 12.3% return for the quarter, marginally outperforming the benchmark. This outperformance is pleasing given that the Fund’s overweight to EMs and the health care sector would have weighed on returns. Four of the underlying managers lagged over the quarter. The largest detractors were the overweights to EMs and the health care sector. In addition, value as a style struggled over the quarter.

Sanders underperformed, with a 9% overweight to health care detracting most as it was the worst performing sector for the quarter. Exposure to financials also detracted. Disappointingly, even though technology had a good quarter, Sanders’ stock selection within the sector detracted. AB is the value-weighted beta mandate for the Fund. Their large overweight to financials hurt the most, with their stock selection in the sector also detracting. Hosking had another tough quarter. Their large overweight to EMs - more than double the benchmark weight - continues to drag on performance. Arrowstreet also detracted over the quarter. The underperformance from their large overweight to health care was largely offset by the underweight to financials. However, their stock selection across most sectors hurt.
Pleasingly, the underperformance of these four managers was offset by Veritas, and more specifically Sands. Veritas was marginally up for the quarter, which is pleasing given their over 17% overweight to health care. Stock selection alpha across the portfolio was offset by sector allocation. Sands had another exceptional quarter, outperforming the benchmark by almost 4%. Stock selection contributed across all sectors.

Portfolio positioning and outlook

Looking forward, we expect more uncertainty in the second quarter. The trade talks between China and the US remain topical and risk assets may benefit if the two countries manage to resolve their differences. We expect Brexit negotiations to dominate headlines as the UK frantically tries to agree on a deal. It would appear that the probability of a Brexit delay has increased and talks of an early election or a second referendum have also resurfaced. This uncertainty has put pressure on companies with UK operations.

In SA, Moody’s gave the country a reprieve when it decided not to update its SA sovereign rating. On the back of this, the rand strengthened in early April. The big event though for SA, however, is the May elections. Post the elections, business confidence could start rising as policy direction regarding SOEs and land expropriation become clearer later in the year.

Market overview

Emerging markets (EM) lagged developed markets (DM) for the second consecutive quarter in 2018 as the global trade war between the United States and China continued to dominate headlines. The US intensified tariffs on Chinese imports, adding 10% on a further $200 billion worth of goods. After the increase, President Trump highlighted that he stood ready to increase the basket of goods should China retaliate. His message fell on deaf ears as China swiftly countered with 5% to 10% increases on $60 billion worth of US imports.

Despite the tussle between the two economic giants, the US economy remains strong. This is visible in the rally of the US dollar; their robust labour market and the 7.7% quarterly return from the S&P 500 at a time when DM only gained 5.1%. These positive developments gave the Fed room to hike interest rates in September from 2.0% to 2.3%.

Unfortunately, the higher DM interest rates and stronger US dollar do not bode well for EM assets and not surprisingly; most countries saw their currencies lose value. EM equities lost 1% for the quarter in US dollars. Year-to-date, this translates to a loss of 7.5%, which is way below the 5.8% return from DM over the same period. The higher oil price helped contain some of the poor performance as oil-producing countries such as Russia, Brazil and the UAE returned 6.6%, 6.2% and 3.1% respectively. Real yields remain high in most countries and in recognition of this and other dynamics, foreign investors have ploughed $13 billion into EM bonds this year and $21.7 billion into equity markets.

South Africa fared worse than its EM peers as signs of poor economic growth surfaced during the quarter, as well as consensus economic growth expectations reducing. This sent the rand from R13.73 to the US dollar at the start of the quarter, to R14.14 by the end of September.

Looking at financial markets, DM rose during the quarter, primarily driven by US market strength and dollar strength coupled with trade tensions, pulled EMs into the red. As a result of these divergent returns, global equities as a whole gained 3.8% is US dollar terms. A weaker rand provided a further 3.0% boost to offshore rand returns.

Portfolio review

The STANLIB Multi-Manager Global Equity Feeder Fund returned a strong 8.5% return over the quarter. This performance was driven by the underlying fund outperforming the benchmark by more than 1% and as mentioned above, the rand’s 3% depreciation added to the absolute returns. The outperformance over the quarter is pleasing given that the Fund’s overweight to EMs would have weighed on returns. Sector positioning, however, contributed, especially the overweight exposure to technology.

Looking to the underlying managers, Veritas had a great quarter, outperforming their benchmark by more than 3%. Having been a large detractor in the recent past, healthcare stock selection came through strongly for Veritas. This strong quarter reverses their losses, bringing their 12-month performance marginally ahead of the benchmark.

Sanders also had a good quarter, which is pleasing given that the value style underperformed. Sector allocation, particularly from the technology sector, contributed most to their outperformance. This positioning is reflective of their pragmatic approach to value. As with Veritas, Sanders’ healthcare exposure also contributed.

Sands’ large overweight to technology contributed over the quarter, resulting in strong alpha. The AB mandate detracted as a result of value underperforming, which is in line with our expectations.

Portfolio positioning and outlook

The economic outlook has not changed much since last quarter. We expect trade wars to continue dominating headlines and this could weigh heavily on EM sentiment. The Fed remains on track with interest rate hikes and could possibly raise rates once more this year. In addition, we view the increased market volatility coupled with markets becoming less directional, as an opportunity for active managers. The global and SA environment remains highly uncertain; hence we continue to emphasize the importance of a long-term focus when making investment decisions