The first four months of 2019 have been strong for global and local equities. After gaining 4.2% in April, the ALSI is up 12.5% for the year. Globally, things are also looking good, with a number of markets recovering most of the losses incurred during the latter part of 2018. The MSCI ACWI was up 3.4% (in USD) in April bringing the year-to-date gains to an exceptional 16%. With the outcome of the local election considered to be market-friendly, the focus will be shifting towards government’s ability to turn the ship in terms of growth. However, in the first weeks of May it has been the global political arena which dominated sentiment. We’ve seen large fluctuations in markets on a day-to-day basis as the world awaits the outcome of trade negotiations between the two largest economies. Global equities nervously shed over 4% in the first 10 days of May.
• Overall
o Global markets continued to generate positive returns, driven largely by an uptick in economic data and decent corporate earnings. In April the MSCI ACWI’s 3.4% gain was largely thanks to a gain of 3.5% from developed markets while emerging markets added just over 2%. A slightly stronger Rand during the month translated into slightly softer returns in Rand from global equities. From an SA perspective, global equities gained 2.8% (in ZAR) in April, but are up over 20% over the last twelve months, boosting the 1-year returns for funds with offshore exposure.
o SA markets: While the local market enjoyed another positive month (up 4.2%), we have seen a significant change at sector level. While the market’s strong gains in the first three months of the year were largely driven by Resources counters, in April, Industrials and Financials led the way in the run-up to the election. A stronger Rand provided to ‘SA Inc.’ sectors as well as domestic bonds which closed the month 0.8% higher.
• SA Equities: A sharp rotation at sector level in April. After strong gains from mainly Resources in the first three months of the year, we saw Financials and Industrials (especially ‘SA Inc.’) taking the lead in April.
o Resources (-2.3%): Slightly softer commodity prices, coupled with some Rand strength the resources counters taking a breather after strong gains over the last year.
? Gold miners (-7.6%) and the Platinum sector (-4.4%) fell the most while General Miners were 3.4% lower.
? The paper stocks added 1.8%, but the only stock in the sector that bucked the trend in April was Sasol. With oil prices continue to gradually rise, Sasol gained 5.6%.
? Increased volatility in the first few weeks of May provided marginal support to precious metal prices resulting in a small uptick in share prices.
? Despite the pull-back in share prices in April, the Resources sector is still up almost 30% over the last 12 months driven by decent valuations coupled by strong earnings growth and rising expectations about future growth expectations.
o Financials (+6.6%): A strong month for Financials after a fairly difficult first quarter.
? April’s gains were broad-based across the sector, but were primarily driven by a 10% gain from our domestic Banks. All four of the big banks outperformed the overall market by a substantial margin with ABSA (+12%) and Standard Bank (+10%) leading the way.
? Santam (+11%) and Sanlam(+8%) also enjoyed a strong month.
? Gains from the Real Estate sector were more muted as the UK-based dual-listed counters came under pressure.
o Industrials (+6.7%): Strong gains from almost all sub-sectors, but it was especially to domestic retailers which took the limelight in April.
? Massmart was up 19% and Mr Price and The Foschini Group respectively added 14% and 13%. The month’s gains for this sector comes with a sigh of relief after 3 consecutive months of negative returns.
? Naspers’ recovery after a difficult 2018 continued on the back of Tencent’s share price gains. Our largest stock in the ALSI was up over 6% in April and up more than 30% since the start of the year, recovering almost all of 2018’s decline.
? While Aspen had a decent bounce in April (up 10%), other Rand-hedge counters lagged. Richemont was flat on the month and British American Tobacco (BATs) fell almost 7%.
? After an extended period of declines, the mobile stocks enjoyed a decent month with Vodacom gaining just over 3% while MTN jumped almost 17%.
• SA Bonds
o The local bond market showed marginal gains in April with the ALBI up 0.8%. Positives for the market (muted inflation and some Rand strength) were offset by nervousness around the outcome of the elections and the impact this could have on future policy direction. The market is showing some resilience in the first few days following the election. That said, global uncertainty around trade negotiations is keeping global investors hesitant to commit assets to SA and other Emerging Markets.
o Inflation linked bonds had a strong month gaining 3.3% on the back of increased demand. However, returns from this asset classes remain fairly disappointing as ILBs gained on 2.8% over the last 12 months.
o Looking forward, valuations look good given the inflation outlook (both locally and globally) is benign; as a result, we expect little pressure on short term rates to move higher both locally or globally. Additionally, a positive result from the local election should mean that we hold onto our stable SA debt rating for now. Rating agencies will however focus their attention on changes being implemented in order to lift the country’s growth prospects.
o Global bond yields moved slightly higher in April after the market saw decent capital gains (yields moving lower) over previous months. However, concerns over the outcome of trade negotiations between the US and China has resulted in investors flocking to the safety of bonds over the first few weeks of May pushing the yield on the US 10year government bond to below 2.4%, levels last seen in 2017.
• SA Listed Property
o The SA listed property sector had a decent month, but with significant divergence in returns between different market segments. While a strong Rand and optimism in the build-up to the elections provided some support to the domestic counters, dual-listed stocks, especially those with operations in the UK came under pressure. Key property indices in April:
? All Property Index (ALPI): +2.0%
? SA Listed Property Index (SAPY): +3.2% (the SAPY has a large weighting to domestic-orientated stocks which outperformed their global counterparts in April).
o At stock level, large-cap domestic counters such as Growthpoint (+6%), Fortress A (+5%) and Vukile (+3%) were some of the market leaders. On the flip-side, offshore counters such as Intu Properties (-11%), Redefine International (-17%), Hammerson (-5%) and Capital & Counties (-1%) had a difficult month. Investec Australia however gained just over 5%.
o Looking forward, the SA Listed Property sector has gone through an extremely volatile 15 months. Concerns around corporate governance from the Resilient stable at the start of 2018 gave way to growing concerns around the sustainability of distribution growth in the sector. On the one side, demand remains muted due to a poor domestic economic environment while on the other side, the market is experiencing an increase in supply, especially in specific office nodes. This imbalance between demand and supply is negatively impacting distribution growth potential. While overall valuations (price/NAV as well as on a yield-relative basis compared to SA bonds and equities) look attractive, distribution growth expectations have been scaled back due to subdued domestic conditions and rising vacancies. Despite declining growth prospects, we believe the sector, in general, offers good value and should provide decent returns going forward. However, risks remain. The Investec Property equity portfolio therefore remains balanced in terms of its positioning with a bias towards selective domestic counters which offer decent growth prospects underpinned by good value. In addition, we have actively increased our exposure to companies which are less dependent on the domestic economy.
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