MARKET PERFORMANCE

The OECD cut its world growth forecast to 2.9% from 3.2% as intensifying trade conflicts take a toll on confidence and investment. On 1 September, the US implemented a further 15% import duty on $110bn of Chinese imports, and China retaliated by implementing tariffs on $75bn of US goods. With drone attacks on Saudi Arabia affecting more than half their oil supply and pushing the price of oil up nearly 20%, trade wars were eclipsed by the threat of world wars. The US, UK, France and Germany have blamed Iran for the attacks, with Trump saying the US is “locked and loaded depending on verification”; US-Iran relations remain a major risk to global stability, with global political uncertainty levels at a five year high.

Central bankers continue to do their best to support growth, with Bank of America Merrill Lynch’s Emerging Monetary Mood Indicator at its most dovish since 2009. September saw Russia’s central bank slash its interest rate for a third consecutive session, to 7%. Indonesia cut rates for the third time, the Turkish Central Bank cut the benchmark lending rate by 3.25% to 16.5% and the Brazilian Central Bank trimmed the benchmark rate by 50 bps to 5.5%. The SARB held our repo rate steady despite weak inflation of 4.3% in August.

The SACCI business confidence index fell to 89.1 points in August, the lowest level since April 1985. The Chamber noted that the “current state of fiscal deficiencies, social injustices and unemployment necessitates an urgent adjustment”, and Moody’s noted that Eskom’s financial position remains a significant threat to economic growth and government debt levels. However, the agency acknowledged that progress would be slow, offering South Africa a temporary reprieve from a sovereign downgrade for the next 12 to 18 months.

US consumer sentiment fell to 89.8 in August, the largest fall since 2012 and its lowest level during Donald Trump’s presidency, amid concerns about the impact of US trade wars. Federal Reserve data showed factory output falling for a second consecutive quarter. This allowed the Fed to lower the main interest rate for a second time this year, but due to steady inflation, the committee was divided on the need for further easing.

Despite lowering the key rate, US bank liquidity dried up in September, forcing the Fed to conduct its first repo auction in a decade, injecting over $400bn into US money markets as overnight repurchase rates spiked as high as 10% and threatened to bring markets and businesses to a standstill. This is a form of quantitative easing, as Fed reserves proved insufficient to fund the US banking system. Speaker of the US House of Representatives Nancy Pelosi announced a formal Trump impeachment investigation, in which Trump is accused of seeking foreign help from Ukraine to smear Democratic rival Joe Biden ahead of next year’s presidential election. However, the challenge is unlikely to pass given the Republican majority in the US Senate. inflation overshoot.

Despite massive opposition, ECB President Mario Draghi restarted quantitative easing and cut interest rates. From 1 November, bond purchases will be conducted at a monthly rate of €20 billion and will continue until interest rates are raised. Reinvestment of maturities will continue as long as necessary and well past the time that interest rates start to rise. The deposit rate was cut from -0.4% to -0.5% and, to support bank lending, a two-tiered system for reserves will be introduced, in which part of the banks’ excess liquidity will be exempt from negative remuneration on the deposit rate facility. Interest rates will only rise when inflation has robustly returned to the 2% ECB target.

UK manufacturing PMI fell to a seven-year low of 47.4 in August. The British parliament voted to force Prime Minister Boris Johnson to delay Brexit to 31 January 2020, and Johnson lost his second attempt to trigger an early general election. Parliament was prorogued until 14 October, but the UK supreme court ruled that Johnson’s advice to the queen to prorogue was “unlawful, void and of no effect”, and parliament reconvened on 25 September. Johnson was defiant and refused to resign or apologise. UK Chancellor of the Exchequer Sajid Javid unveiled a £13.8 billion boost to government spending in areas such as health, education and security – the largest increase in public spending in 15 years.

India’s economy grew at a slower-thanexpected rate in the three months to June, at 5 percent year-on-year. As a result, India’s government announced a reduction in the corporate tax rate to boost the economy.

The Chinese official manufacturing PMI eased slightly to 49.5 in August, staying below 50 for the fourth month in a row, while industrial output and retail sales grew more slowly than expected. However, Chinese service sector data for August showed its fastest expansion in three months. The People’s Bank of China announced a 50-basis-point cut in the reserve requirement ratio, which will take the cash reserves to their lowest since 2007. China also cut its one-year benchmark lending rate by 5bp (from 4.25% to 4.20%) for the second consecutive month in attempts to further support growth.

FUND PERFORMANCE

The Sygnia Skeleton Worldwide Flexible Fund returned 2.5% for the quarter, compared to its long-term target, CPI + 5% per annum, which returned 2.2%. Outperformance was driven by the Fund’s large offshore exposure and a large exposure to SA Income.

We started the third quarter of 2019 with a moderate underweight in SA Equities and a large underweight in SA Bonds. During the quarter, both SA Equities and SA Bonds fell to new lows as growth and political concerns within South Africa rose, culminating in a downgrade of South Africa’s credit outlook by Fitch. This local pressure was made worse by a global fear of emerging markets as trade wars and geopolitical risks increased. SA asset classes were driven to levels offering value and, as a result, we partially closed the SA Equity and SA Bond underweights. Buying these asset classes was supported by central banks, which are at their most dovish since 2009, with the Fed cutting rates twice this year and starting open market operations, and the ECB cutting rates further into negative territory and restarting QE. In addition, China has added further stimulus, cutting the lending rate twice and lowering reserve requirements to their lowest level since 2009.

These positions were taken in line with the Fund’s investment objective of providing superior longterm returns while protecting capital over the medium to long term.

MARKET PERFORMANCE

Developed-market central-bank policy easing has contributed to the longest-ever economic expansion - over 10 years. Global monetary policy easing reached new highs as the universe of negative-yielding bonds jumped to a record $13tn, gold to six-year highs and the S&P500 to all-time highs. Both the US Fed and ECB vowed to cut rates if necessary. The Bank of Japan has continued to ease monetary policy, because, on the back of trade tensions, global-manufacturing confidence indices have fallen into contraction, Citi's Global Economic Surprise Index has experienced the longest period of disappointing economic data on record and the Brent crude oil price dropped 20%. Amid escalating disputes, the World Bank downgraded its global growth outlook to the weakest pace in three years, forecasting 2.6% this year. The largest threat to the economic outlook is U.S. President Donald Trump's trade and tech wars, the latter being of particular concern, as 27% of the S&P500 Tech sector's revenue is exposed to China. Trump has an incentive to keep the market buoyant with 2020 elections around the corner, but the risk of miscalculation is high when using untested tools. Trump said that his meeting with China's President Xi Jinping at the G20 leaders' summit in Osaka went far better than expected and that he would not increase tariffs. He added, however, that he was "in no hurry" to cut a trade deal.

South Africa's Q1 GDP fell the most in a decade, down 3.2% on the back of loadshedding issues. Seven of nine areas of the economy are in decline: agriculture declined a massive 13%, with farmers still unsure of their property rights, and mining was down 10% on power concerns. The rand lost considerable ground, breaking above R15 to the USD, and the yield curve rose to its steepest levels on record in response to a statement by ANC Secretary-General Ace Magashule that the organisation had decided to change the Reserve Bank mandate and begin "quantity" easing. The ANC's economic transformation head, Enoch Godongwana, SARB governor Lesetja Kganyago, Finance Minister Tito Mboweni and President Cyril Ramaphosa confirmed that the party would not seek to nationalise the central bank nor expand its mandate. The South African Chamber of Commerce expressed concern that the government is "at war with itself". The debt market is concerned about continuing to fund state-owned enterprises, after Ramaphosa announced more front-end loaded support for Eskom in his State of the Nation address. Inflation rose to 4.5% in May, but the SARB's forecasting model suggests there is room for interest rate cuts.
The IHS Markit US manufacturing purchasing managers index (PMI) declined to 50.1, its lowest level since September 2009, and consumer confidence is at two-year lows. The Fed cut its inflation forecast and suggested a rate cut could happen as early as July unless trade tensions and economic data improve. The 10-year Treasury note yield fell below 2% as US rates markets moved to price in roughly three rate cuts from the Federal Open Market Committee (FOMC) in 2019. This aggressive move is normally only associated with an economic recession, but the Fed is changing the reaction function that will encourage an inflation overshoot.

Eurozone inflation expectations plunged to a record low (1.1% on the five-year forward rate) as investors worry that the economy is slipping into "Japanification", an inescapable period of stagnant growth and low interest rates. Unsatisfied with the market's view, Mario Draghi, President of the ECB, announced possible interest rates cuts and a fresh round of bond purchases. The TLTRO-III stimulus programme will start in September, and tax cuts have been announced in some of the major economies.

After three years of political deadlock over Brexit, the ruling Conservative Party is picking a new leader. Boris Johnson is the favourite to succeed Prime Minister Theresa May, and the new prime minister should be in place by the end of July. Johnson vowed to deliver Brexit with or without a deal. Brussels has underlined that it will not reopen Britain's EU withdrawal deal, stressing that the next prime minister should honour the deal that Theresa May brokered.

China's central bank added 500 billion yuan ($72 billion) to the financial system, the second-largest injection on record. The financial support was required after the government's first seizure of a bank in more than two decades drove up funding costs. The Chinese services sector is holding up well despite a slowing manufacturing sector (Chinese factory output slowed to its weakest pace on record), and infrastructure investment is being encouraged in order to ensure growth does not slow beyond the government's "reasonable range".

India's central bank cut its benchmark interest rate for the third time this year, to 5.75%, the lowest level in nine years, and signalled the possibility of further easing in a bid to support growth. However, the central bank suffered a blow to its credibility after the resignation of deputy governor Viral Acharya.

Russia's central bank cut the key interest rate and hinted at future reductions. Australia's central bank cut interest rates to a record low of 1.25%.

Fitch and Moody downgraded Mexico's credit rating against the backdrop of rising trade tensions. Fortunately, President Trump "indefinitely suspended" his plans for U.S. tariffs on Mexico, removing the threat of a 5% tariff on Mexican imports.

Turkey's opposition party, the Republican People's Party, secured 54.2% of the vote in a re-run Istanbul mayoral election, striking a blow to President Tayyip Erdogan.

FUND PERFORMANCE

The Sygnia Skeleton Worldwide Flexible Fund returned 2.7% for the quarter compared to its long-term target, CPI + 5% per annum, which returned 2.9%. Underperformance was driven by poor market conditions, with the Fund’s large offshore position detracting from performance on the back of a stronger rand.

We started the second quarter of 2019 with an overweight exposure to emerging markets in our global equity portfolios and an underweight to Europe. With the Fed announcing its intention to cut interest rates and the ECB similarly announcing the possibility of further negative rate cuts, the value of negative yielding bonds hit a new high of USD13tr. This is likely to drive investors into a more cyclical position and lead to a weaker dollar. As a result, we increased our exposure to emerging markets. We simultaneously cut our underweight to Europe in half, locking in the gains of 2018.

These positions were taken in line with the Fund’s investment objective of providing superior longterm returns while protecting capital over the medium to long term.

Markets were driven higher over the first quarter thanks to improved support from central banks and governments despite the downward trajectory of economic growth. China has surprised to the upside with fiscal stimulus, while the Fed has stopped raising interest rates, reduced quantitative tightening and shifted its monetary policy towards an average inflation target. The ECB announced another round of quantitative easing, and emerging-market central banks are able to accommodate lower interest rates due to stronger currencies. The recovery in risky assets year-to-date reflects expectations of economic green shoots in the second half of the year thanks to this additional liquidity; however, bond markets are disagreeing with this view and are extrapolating current disappointing growth to the second half of the year. The US yield curve inverted, suggesting a recession is imminent, while the German 10- year Bund yield went negative for the first time in three years. Meanwhile, emerging market currencies are pricing another crisis, following the Turkish Lira's plunge.

Real gross fixed capital formation contracted for the fourth consecutive quarter in 2018 across all sectors which bodes poorly for future growth. The RMB/BER business confidence index (BCI) plunged to levels last seen during 2009's global recession. Confidence was further weakened as President Ramaphosa confirmed that the ANC will nationalise the South African Reserve Bank. Meanwhile, NERSA's tariff increases, the lack of tax relief in the budget, higher oil prices, and renewed stage four load shedding have all contributed to low consumer confidence. CPI remained lacklustre at 4.1% in March and the SARB kept rates on hold. Despite the higher tariffs, Eskom's liquidity position remains dire and it is the biggest risk to SA's economic growth and credit rating, although Moody's kept South Africa's rating outlook unchanged at stable. On the stock front, Aspen fell over 50% intraday after disappointing results with spiralling debt the main concern.

The Fed delivered a significantly more dovish outcome at its March meeting than expected, with the committee downgrading growth and inflation projections in line with recent data. US employment showed only slight growth, manufacturing slowed more than expected and consumer confidence dropped well below expectations. US consumer prices experienced the smallest increase in nearly two-and-ahalf years. As a result, the Fed effectively called an end to its hiking cycle with no hikes forecast this year. In addition, the committee announced that quantitative tightening will be lowered in May before being halted completely in October, effectively ending US quantitative tightening. The Fed is also willing to tolerate an overshoot of their inflation goal. However, despite this, the gap between the three-month treasury bill rate and the benchmark 10-year yield inverted for the first time since 2007. An inversion of that portion of the yield curve is seen as a reliable warning of a potential recession within the next year or two. The US trade deficit reached a 10-year high in 2018 on record imports from China, which continues to highlight the risks of the trade talks which are set to continue into April.

March's Eurozone manufacturing index fell to a near six-year low and investor confidence remained negative for the fourth consecutive month. The ECB downgraded growth and inflation forecasts and in recognition of the poor outlook, announced dovish policy changes. Rates are now expected to stay unchanged throughout 2019 and a third series of quarterly targeted longer-term refinancing operations (TLTRO-III) will be implemented.

Theresa May put forward a stripped-down version of her twice-defeated Brexit divorce deal to a vote in parliament, however, lawmakers rejected May's Brexit deal for a third time. May had announced she would resign if her deal went through. As a result, the EU's extension of the Article 50 period will only run until 12th April. Britain now needs to convince the EU it has an alternative path or exit without a deal, and the UK parliament's indicative votes process is set to start on the 1st of April.

The composite PMI rose to 53.8 indicating acceleration in activity. However, geopolitics remains a concern as tensions increased between India and Pakistan over the disputed Kashmir region, after an Indian MiG-21 fighter jet crashed near Pakistan. The pilot, who had safely ejected before the crash, was later paraded on Pakistani television. India heads for national elections in April.

Turkey entered its first recession in a decade at the end of last year and the Turkish central bank's net reserves slid $6.3 billion in the first two weeks of March to $28.5 billion, raising speculation that it was intervening to support the currency. As a result, the Lira sold off and the cost to borrow liras overnight rose above 1000% as Turkey's government attempted to support the currency. The Turkish lira fell after President Erdogan's ruling party lost control of key cities during the local elections on the 31st of March.

Core Machine Orders fell -5.4%, far below expectations, while output at Japanese manufacturers fell at the fastest pace in almost three years. The Bank of Japan held its monetary policy steady and predicted the economy is likely to continue its current moderate expansion.

China's industrial production grew at the slowest pace in nearly two decades in the first two months of the year and China's exports tumbled 20%, the biggest fall in three years. China lowered its official goal for economic growth in 2019 to a range of 6 - 6.5%, however, it announced several growth supportive measures, including US$298.31 billion in tax cuts. In addition, China said it will invest 800 billion yuan in railway construction and 1.8 trillion yuan to build roads and waterway projects. Fiscal policy is increasing steadily, including local bonds to the general public deficit, the total is a massive 6.5% of GDP. Initial March data indicates domestic demand is improving on the back of policy support.

Oil prices hit their highest levels of 2019 after OPEC committed itself to further output cuts and sanctions on Venezuela and Iran reduced supply.


FUND PERFORMANCE

The Sygnia Skeleton Worldwide Flexible Fund returned 7.2% for the quarter compared to its long-term target, CPI + 5% per annum, which was 1.7%. Outperformance was driven by strong market conditions, with domestic equity markets up 6% and global equity markets up 12%. The Fund’s offshore positioning also contributed to performance.

The fourth quarter of 2018 began with an underweight exposure to emerging markets in our global equity building block. This position worked tremendously well for the funds, but given a number of positive catalysts, we decided to close this position and bank the profits in Q4. The first quarter of 2019 favoured emerging markets. The Fed not only announced patience on further rate hikes, but also discussed an end to quantitative tightening much sooner than expected. Together with aggressive fiscal stimulus from China, this allowed us to take emerging markets to overweight and reduce the US to neutral. Other changes included taking profit on our offshore equity position and our US bond position.

These positions were taken in line with the Fund’s investment objective of providing superior longterm returns while protecting capital over the medium to long term.