Old Mutual Investors comment - Sep 14 - Fund Manager Comment23 Dec 2014
The JSE All Share Index gained ground early in the quarter, registering a new all-time high towards the end of July of just above 52 000. However, it gave away all its gains in September, in line with pullbacks in many other equity markets worldwide. A combination of factors foreshadowed the correction, including:
o Markets becoming overbought after achieving new highs on the S&P 500 and strong runs in many other markets;
o Still lingering concerns about Russian intentions in the Ukraine;
o Weaker economic data in China, Japan and the Eurozone contrasted with strong indicators in the US, which cast doubt over the durability and breadth of the global recovery;
o Persistent concerns about the timing of the US Federal Reserve (Fed)'s first interest hike in the new cycle.
Our approach remained biased toward a weaker rand and a moderate outlook for commodity prices. We saw this continue to play out through the quarter as commodity prices and the rand weakened in line with dollar strength as growth in Europe and China disappointed. The fund was well positioned in this environment, given its relatively low exposure to mining shares and, in particular, a modest exposure to gold and platinum where our preference has been in the ETF over the shares. In our view, the commodity market is reverting back to the environment of the 1990's where commodity shares were useful at times to consider as an opportunistic short-term investment. Chinese growth is expected to be more balanced and measured than the environment that drove the commodities market higher during the five years in the lead up to the global financial crisis.
The Fund's positioning in the industrial sector is biased toward Healthcare and Pharmaceutical stocks, which performed strongly during the quarter. In an uncertain and low-yield economic environment, South African healthcare counters have provided the investor with attractive qualities, namely defensive business models, double-digit earnings growth and rand-hedge qualities. Specifically, we prefer Aspen, Mediclinic and Netcare, which have all significantly outperformed the market.
We remain cautious on consumer shares. Consumers remain under pressure as a result of elevated inflation, rising interest rates, slowing wage and credit growth and lacklustre employment creation. In the meantime, the SA Reserve Bank has indicated its intention to continue to 'normalise' interest rates at a gradual pace, so that it is not caught by surprise by any tightening from the US Fed. With this in mind, we prefer shares with more diversified industrial exposure, such as Remgro and Bidvest. One of the strongest performers during the quarter was Telkom, where we were opportunistic and bought a small position before trading out of the holding after making an attractive profit for investors.
Detractors from performance during the quarter were our underweight positions in outperforming SABMiller, real estate and MTN.
The banking sector was weak during the quarter, declining 1.2%. The quarter was dominated by African Bank, which was placed under curatorship (due to poor levels of capital and credit quality), and weak SA GDP numbers. The fund had a zero weighting in African Bank so the fund suffered no losses as a result of it being placed under curatorship.
Weak growth, combined with high consumer debt levels and rising interest rates, meant it was generally a tough environment for the banks. In this context, we prefer companies that are well capitalised and have strong operating metrics. This is reflected in our positioning in Barclays and FirstRand.
The Fund continues to outperform its benchmark over one, three and five years.
The outlook for equities remains reasonably positive, with the combination of buoyant global growth and still very low interest rates supportive of equities and negative for fixed income assets.
We continue to prefer non-mining shares linked to the global cycle (Global Cyclicals), rand hedges and SA worldwide stocks, which will benefit both from modest global growth and poor rand fundamentals. We are reluctant to take long-term positions in mining stocks and prefer to opportunistically take advantage of any improvement in the outlook for commodity prices. We continue to monitor the outlook for the SA consumer but generally seek more appealing valuations in the related shares.
Old Mutual Investors comment - Jun 14 - Fund Manager Comment28 Aug 2014
The global economy ran at a surprisingly slow pace in the first half of 2014 - firstly, due to weather disruptions and, more recently, due to a disconnect between survey data (buoyant) and underlying hard data (sluggish). We still think that the second half of the year will deliver global growth around, or even slightly above, par. The US looks to be moving ahead strongly, China is ticking up on the back of a number of carefully controlled stimuli, Eurozone is fading slightly, but new orders remain firm and Japan is digesting the large VAT rate hike in April.
With global growth picking up only modestly, central banks in developed countries are set to remain accommodative. Both the US Federal Reserve Board (Fed) and the Bank of England (BoE) have indicated that rising asset prices will not cause them to tighten policy at this stage.
We remain cautious on resources stocks, taking our exposure mainly in Sasol and the diversified miners. The iron ore price finally moved down to the long-anticipated US$90-100/tonne range on the back of a surge of supply this year. From here, there appears to be a fair chance that industrial commodities could pick up modestly through the remainder of 2014. This should support the large miners which continue to cut capex and improve cash flow.
The SA consumer remains depressed. Inflation is rising, interest rates have turned up and wage rates have decelerated, notwithstanding the platinum strike. Although some retailers appear to be offering value, there are still headwinds that deter us from building positions at this stage and we prefer to take our exposure through diversified consumer stocks.
The rand remains vulnerable. Although the current account deficit improved surprisingly sharply in the six months to 30 June, this is unlikely to be sustained owing to the production lost in the platinum strike. The National Union of Metalworkers SA (NUMSA) strike in the third quarter will also hit exports unless it is quickly resolved. SA continues to stand out from its emerging market peers, leaving it vulnerable to any decline in foreign capital flows. This view supports our preference for global cyclicals, rand hedge and SA worldwide stocks.
Old Mutual Investors comment - Mar 14 - Fund Manager Comment02 Jun 2014
After running well above par in the fourth quarter of 2013, the global economy slowed in early 2014. Much of this was due to severe weather disruptions in the US and Japan, but also to China, where the government is tapering aggressively to curb excess credit demand. Towards quarter-end, the growth run rate picked up again as weather effects eased. We think that global growth will run at around the 40-year average of 3.5% this year, compared to 2.9% last.
Within this context, our cautious view towards metal prices was proven correct as US dollar metal prices fell in the first quarter of 2014, with copper down 11% and iron ore 17%. Slower than expected growth in China was the main culprit and we remain concerned about the Chinese fundamentals and their impact on industrial commodity prices. Our preference until now has been for oil over metals. The fund holds close to 10% in Sasol, which has significantly outperformed the miners, to which we have held a lower exposure over the last few years. However, we traded the miners during the quarter as we sold at higher levels and bought back in after the shares had been sold down.
While we remain cautious on the fundamentals of gold in the short term, the fund participated in the recent rally in gold share prices. We bought into gold towards the end of last year and added further this quarter as we recognised that gold shares were much oversold relative to the metal. Our very low exposure to platinum over the last few years has been the correct position given the significant underperformance of this sector. However, more recently we added the platinum ETF to the portfolio as this is our preference over the platinum miners, as the latter are plagued with production inhibiting strikes.
In our view the platinum price is likely to remain subdued despite the recent decline in production, given the significant platinum stockpiles around the world which continue to adequately fund the current and any forecast deficit of the metal. However, mine profits will be significantly impacted by the strikes, hence our preference for the ETF, which provides investors with some insurance and protection from a rand, which remains vulnerable.
After reaching a cyclical high of R11.25 vs the US dollar, the rand has retraced somewhat. There are signs that the large current account deficit is starting to contract. However, we think the currency remains fundamentally vulnerable as the current account deficit will still remain substantial and funding it will not be easy. The fund has benefited from its weaker rand bias over the last 18 months, and we have largely maintained this positioning.
We remain underweight to consumer shares based on our view that the South African consumer is set to remain in a very difficult space for most of 2014, as rising inflation and interest rates plus slower credit growth offset pay rises. Only towards the end of the year are these headwinds expected to abate. In addition, valuations in this sector remain unappealing with one or two exceptions. Within the local South African economy plays we continue to prefer banks, life assurance and the diversified industrials, such as Bidvest and Remgro.
We still favour global cyclical and rand-hedge stocks, as well as those such as MTN, Old Mutual and Investec - with a more 'worldwide' footprint to participate in steady global growth, while maintaining protection against rand vulnerability. Within resources, we are overweight to diversified miners and oil (Sasol) as these companies restructure their businesses to the benefit of shareholders and investor appetite for risk.
While an at-par global growth rate and low interest rates remain positive for equities, the preferred mix is gradually shifting towards higher risk, value plays which we carefully consider in our stock selection and overall structuring of the fund.