Global Markets:

The MSCI World Index (Developed Markets) was down 2% this month whilst Emerging Markets were flat. The major contribution to the negative return of developed markets was the US S&P Index which lost 1.8% in the month. October is infamous for bringing market corrections, so on this occasion this may not be a bad result!

By the time our next market update is written the appalling contest for the next US president will be over. Last week FBI Director James Coney announced that the FBI had reopened its investigation into Clinton’s use of an unauthorized e-mail server. This caused the US Dollar to weaken and the S&P Index fell rapidly. Presumably this was an indication of the negative view markets have on a Trump presidency. However, as JP Morgan Asset Management pointed out either way, there is probably less change coming than some think: “there will be much less change than promised as the House of Representatives will remain in Republican control and it is highly unlikely that Congress in general, would rubber stamp the policy agenda of either potential president. It is therefore possible that the outcome of the election is that much less change is likely to be delivered than is being promised.”

In the UK, the British Pound fell more than 6% against the US Dollar this month. The move followed concerns that Theresa May will deliver a ‘hard’ Brexit. For those who have been wondering what this latest bit of jargon refers to – a “hard” Brexit means Britain will leave the single European market and switch to World Trade Organization rules. Effectively it means Britain will stand entirely on its own. A “soft” Brexit means trade with the EU states will continue to be tariff-free and exports would not be subject to border checks. Financial firms would keep their “passporting” rights to sell services and operate branches in the EU. However, this would come at the cost of losing some control over other areas, immigration being the most politically contentious. Presumably the Brexit deal could land somewhere between the two. For those with interests in the UK, brace yourself. Negotiations start in March next year and it is likely to be a rollercoaster.

Notwithstanding the political noise, global growth edged up this quarter. Third quarter GDP growth figures show the US grew at an improved annualised rate of 2.2%. China and the Eurozone grew at 6.7% and 1.3% respectively which was in line with expectations.

Other quarterly data released shows that inflation is also ticking up, albeit gradually. US inflation was 1.5% and Eurozone inflation at 0.5% for the last 12 months. Both regions target inflation of 2%, so there is still plenty of room for improvement, but the trend is in the right direction. As deflation has been a real risk since the financial crisis, each increase in growth and inflation moving us away from that scenario and closer to historic norms is welcomed by investors.

Finally we note that the Oil price broke through $50 per barrel this month, which if sustained will further support inflation.

South African Market:

As at 31 October 2016, the three year return of the All Share Index was 8% per annum. The return over the last five years has been a respectable 13% per annum. This return is around the long term average return of the SA stock market since 1925. South African equities appear to be going through a period of below average equity returns. For some time our asset managers have been telling us to expect this, and perhaps that period has now arrived.

The returns of a portfolio with exposure to equities must be viewed in the context of the returns of the equity market. In general a fund manager cannot be expected to deliver returns contrary to what the market is doing as a whole.

However some funds do outperform the market and their peers from time to time whilst others go through periods where they will underperform. At our October investment committee meeting we noted that that funds with a “value” approach to investment have now firmly outperformed their peers over a 12 month period. “Value” managers have replaced “quality” managers at the top of the 1‑year performance tables. Value managers include RECM, Allan Gray, Aylett & Co and to a lesser extent PSG and Coronation. Such changes at the top of the performance tables are not predictable. However, a portfolio with exposure to different investment styles will mitigate to some extent against going through the extremes of under- and out-performance that exposure to a single investment style delivers. A combination of styles will deliver a smoother overall return.

If we are indeed entering a period of below average equity returns, this will certainly impact portfolio returns. However a robust portfolio with exposure to different asset classes and styles, and consequently different sources of return, will expand the range of investment opportunities available to you. This is one way of navigating through such a period.

Another impact on portfolio returns has been the strengthening of the Rand. As we write this, the National Prosecuting Authority Director, Shaun Abrahams has kindly given the Rand a boost by withdrawing charges against Pravin Gordhan. In the UK Brexit is playing havoc with the UK Pound. Neither event was predictable. Who foresaw a Rand strengthening from R16.87 after Nenegate, to R 13.47 in just over a year? Yet once again our currency has done the unexpected. Despite an avalanche of negative domestic news ranging from the bizarre to the ridiculous, the Rand has strengthened more than 10% against the US Dollar and 25% against the UK Pound since the beginning of the year. A number of domestic funds did reduce their offshore exposure somewhat during the course of the year, to protect their portfolio from a strengthening Rand after it reached extremes post Nenegate. However notwithstanding this the majority of funds have had a material exposure to offshore investments, and this Rand strength has hampered their returns.

Both the Rand strength and the subdued equity market performance, reminds us that in the short term investing can be volatile and uncertain. It must be viewed as a long term game. The short term gyrations of markets (currency volatility and stock market volatility) should be taken with a large pinch of salt. What is important is that you are invested in the right asset classes for your risk profile and adopt the right mind-set, which generally requires a very long term perspective.