Market Insight: 10 Years Later

It is ten years ago that the sub-prime housing loan debacle and the then Global Financial Crisis hit the world. The wise men and women at the helms of global economies steered us through what could have been calamitous times, but we still feel the after-effects of what we hope to be a once-in-a-lifetime event.

Economic conditions in 2018 do not provide for easy investment returns. Retirement fund members experienced pressure on investment returns from January to March and again in May, while April and June provided positive experiences (see Figure 1).

Figure 1: Monthly investment returns
Figure 1: Monthly investment returns

It is not hard to see that investment returns were poor during the months that the rand strengthened to R11.80 per US dollar, but that investment returns improved during June when the rand weakened to R13.70.

Figure 2: US dollar per EURO
Figure 2: US dollar per EURO

Economic factors that contributed to tough investment conditions include:

Higher interest rates in the US;

Protectionist US trade policy;

Lower emerging market exposure;

Underwhelming GDP growth in South Africa;

Policy uncertainty in South Africa.

Changes to these economic variables contributed to the US dollar strengthening relative to other currencies (such as the rand).

Investment managers that maintained high exposure to offshore investments and rand hedge shares in South Africa performed poorly in the quarter to March 2018 when the rand closed at R11.80, but performed much better in the quarter to June when the rand weakened to R13.70.

*Figure 3: Asset class investment returns to June 2018
*Figure 3: Asset class investment returns to June 2018

For the six months to June 2018, SA shares (Capped SWIX Index) returned -5.9%, SA bonds produced a return of 4% and offshore shares added 11.8%. SA listed property struggled with a return of -21.4% and SA inflation-linked bonds recorded -0.6%. SA money market contributed 3.6% and the 9.3% rand-based return on global bonds was driven largely by the rand weakening.

Figure 4 shows that Foord Balanced Fund performed better than in the past, compared to peers. Foord is in the top quartile for the most recent quarter and the calendar year to June 2018, but in the bottom quartile for 1-year, 3-year and 5-year periods. This is because Foord positioned their portfolio to benefit from offshore exposure and rand hedge exposure. Investec and Allan Gray remain consistent top quartile performers. In the bottom quartile, Oasis appears to rely less on global and rand hedge exposure as they perform better than many peers do in periods when the rand strengthens, but underperform peers when the rand weakens. Stanlib moved out of the bottom quartile in 2018.

Figure 4: Top and bottom quartiles of global balanced funds to June 2018
Figure 4: Top and bottom quartiles of global balanced funds to June 2018

It is difficult to predict investment returns to the end of 2018 with any level of confidence. We do recognise that financial markets are currently driven by global, macroeconomic factors (such as changes to the global monetary base and global trade) more than factors that pertain to South Africa only. We expect this trend to continue in the short term and the US dollar to continue strengthening over the next 12 months (rand weakening). This would imply that global exposure held by retirement funds may continue to perform well and the fortunes of large rand hedge shares in South Africa could improve, while returns on interest-bearing investments may contribute more modestly than in the recent past.