Economic and Performance Update – July 2021

Commentary

Local markets declined in June after posting seven months of gains as commodity counters were under pressure on the back of lower commodity prices. The All Share Index fell 2.4% as resources lost 6.5% and financials declined 2.6% as investors feared the impact of the Delta variant. Industrials eked out a small gain of 0.4% as gains from rand-hedge stocks British American Tobacco and Richemont (up 5.2% and 4.1% respectively) offset losses from Naspers and Prosus. The rand weakened by 3.9% against the dollar as the Fed signalled the possibility of two interest rate hikes in 2023 (sooner than expected). The All Bond Index rose 1.1% as yields on the SA 10-year bond stayed below 9% at month end despite the weaker currency. Listed property gained 3.4% as property companies with foreign exposure released good operating results.

Global markets initially struggled for direction as the Fed hinted at possible interest rate hikes (in 2023, no less), but positive momentum returned after the Fed calmed investors with their flexible stance on inflation. The US’s S&P500’s 2.3% gain was largely driven by gains in technology companies (the S&P500 Technology index gained 7%) and energy stocks, as low interest rates fed through to tech valuations and oil prices remained high. The MSCI World Index (up 1.5%) again outperformed the MSCI Emerging Markets Index (up just 0.2%) as the stronger dollar, lower commodity prices and China’s regulatory crackdown put pressure on developing markets. Bond investors appeared unfazed by surging inflation and bid the US 10-year government bond down to 1.48% at month end. Yields elsewhere, and especially in the developing world, rose resulting in the Barclays Global Bond Aggregate losing 0.9% for the month. Global property stocks gained 1%, benefitting from low interest rates and the tentative “return to normal” in parts of the world. Oil prices surged 7.6% in the month to close at $73.50 per barrel as demand recovered and inventory declined, while gold prices fell 7% as investors rotated out of the safe haven metal into growth assets.

UWRF Portfolio Performance

The UWRF portfolios performed relatively well in June as the domestic and global managers outperformed.

The UWRF Growth portfolio gained 1.14% net in June, well ahead of the strategic benchmark return of 0.83% and significantly ahead of the peer group average of 0.24%. The one-year return of 20.9% net is well ahead of the benchmark return of 17.1% and ahead of the peer group average of 18.3% (gross).

The Conservative portfolio gained 1.37% net, outperforming the strategic benchmark return of 1.16% for the month. The one-year return of 17.3% is well ahead of the benchmark return of 14.8%.

The Shariah portfolio, managed by Oasis, performed well in absolute terms, recording gains of 0.7% as the overweight property and offshore exposure contributed. The one-year return of 8% remains far behind the benchmark return of 17.3% but ahead of the CPI-plus objective.

The Capital Protection portfolio gained 0.33% for the month, ahead of the benchmark’s 0.31%, as yields were stable in the month. Annual returns of 4.3% are marginally ahead of the benchmark’s 4.0%.

Fund/Manager Returns (actual UWRF returns, net of fees, used for all managers)

The Fund’s domestic equity managers all outperformed the Capped SWIX Index, which fell 3%. The active managers marginally outperformed the benchmark with Allan Gray (-2.9%), Coronation (-2.9%) and Abax (-2.8%) all having a fairly high exposure to underperforming Naspers. The ABSA Multi-Factor ETF portfolio (-1.3%) performed well as all underlying ETF’s within the multi-factor ETF portfolio again outperformed.

The Fund’s bond allocation marginally outperformed the All Bond Index (+1.1%) for the month as Futuregrowth’s outperformance offset Stanlib’s underperformance.

The Fund’s property manager, Sesfikile, gained 3.3%, broadly in line with the index’s return.

All three global managers performed exceptionally well in June, with Ninety One, Baillie Gifford and Vulcan posting ZAR gains of 7%, 7.2% and 7.5% respectively.

The small exposure to the All Seasons Africa Fund contributed to returns in June as the fund gained 3.3% in ZAR (but lost 0.75% in USD).

The passive multi-asset portfolios marginally underperformed their active counterparts as the more concentrated domestic equity ETF’s again lagged. The Sygnia Growth portfolio gained just 0.46% for the month while the etfSA Growth portfolio gained 0.78%. The Conservative portfolios posted better gains but were also slightly behind their active counterparts with the etfSA Conservative portfolio gaining 1.12% for the month, while the Sygnia Conservative portfolio gained 0.93%.

July so far

With the tragic events of the past week negatively impacting sentiment, it is a surprise that local markets remain broadly flat month to date. This illustrates the extent to which the JSE is dominated by companies with foreign earnings which have actually benefited from the weaker rand. Bonds too are fairly stable considering the extent of the damage to SA’s reputation, while property stocks have lost less than 2%. In the UK, people are celebrating “freedom day” as all restrictions relating to the pandemic have been lifted but investors elsewhere (especially in the US) fear the Delta variant will derail efforts at a full reopening. Investors are also concerned that inflation could linger for longer as prices continue to rise across the board. Core CPI in the US jumped 4.5% in June – the highest rate since September 1991 – as the prices of used cars rose over 10% in the month (and are up 45% for the year!). While the price gains in some items, like possibly used cars, may be temporary others, like housing costs, also continue to climb and have started to worry some members of the Fed’s monetary policy committee.