API Quarter 3 Summary 2019


Local equity markets dropped in the third quarter following their recovery in the first half of 2019. The JSE All Share Total Return Index fell by 5% over the quarter, with the month of July and August declining by 2.2% and 3.2% respectively. The month of September was up marginally at 0.2%.

Chart: Performance of the FTSE/JSE All Share Index over the past six years (2013/04/15 – 2019/07/03)

The pull back in the month of May was due to internal factors such the need for an additional Eskom bailout. A common factor to short term movements in the South African market is the trade tensions between Trump and China. The month of August and September saw growing concerns around renewed trade tension and the further threat of slowing global growth. When trade tensions rise, emerging markets experience short-term volatility. South Africa is one of the most liquid (easy to buy and sell) emerging markets which means that when emerging markets as an index are sold off as they have in the third quarter, South Africa is one the first markets to be sold. Despite the growth issues that South Africa faces in lieu of rising debt levels, the local markets appear to be more significantly affected by news surrounding Trumps trade war than actual South African factors happening on the ground.

We expect this volatility to continue going forward.

Source: Money Mate 30/09/2019 * Annualised Performance


A question that investors often wonder about during periods of poor returns is whether their fund/s are underperforming relative to others. This raises the question as to whether they should make changes to their underlying funds in order to pursue a better return.

The 3 graphs shown below represent the historical rolling 5-year return from the respective funds since 2005. In other words, the blue bars represent the range of best to worst returns from the funds in any rolling 5-year period dating back to 2005.

The red dots show the current annualised 5-year return from the funds compared to what they have historically achieved. Apart from one or two funds, the peers are experiencing their worst 5-year return since 2005. It is also important to note that the underperformance is not isolated to a handful of funds but rather the sector as a whole.

The SA MA Low Equity Funds (Stable Funds)

The SA MA High Equity Funds (Balanced Funds)

South African Equity General Funds (Local Equity Funds)

Why has this been so uncomfortable for investors?

The graph below shows the real return (return after inflation) of the South African All Share Index from before the Global Financial Crisis. The 2008 financial crisis saw a sharp decline in the local market followed by a period of recovery and positive growth over the following years. At its highest point in 2008, it took the All Share Index around 6 months to reach its lowest point during the financial crisis. After 6 months the All Share Index started to recover. It took almost 3 and a half years for the All Share Index to recover to its previous peak of 2008 after which it continued to perform well until February 2015.

Since February 2015 the All Share Index has slowly declined in real terms (return after inflation). This period of “purgatory” has been difficult for investors to bear and it has come at a time when cash is yielding an attractive return. The message to conventional investors during the financial crisis was, stay the course. After a protracted period of poor returns, it is difficult to resist the call to action which can result in making ill-advised decisions such as chasing performance by switching from one fund to another.

There is a consensus amongst managers such as Allan Gray, Coronation, Prudential, PSG, Foord and Investec that there are undervalued (cheap) companies in the local market which they have bought into over their period of decline. Some of these companies derive the majority of their earnings from around the world and therefore they are not fully dependant on the South African economy. There is also a consensus amongst managers that the returns over the next 5 years will be better than what we have experienced during their period of “purgatory”.


The graph below shows the degree to which the respective markets are trading in bear market territory. The figures are calculated in dollar terms. We see that the majority of the South African market is trading in bear market territory. The JSE has twice the number of companies trading in a bear market, compared to the US.


Based on valuations (how cheap or expensive a company is) the JSE All Share Index appears to be attractively priced with much of the “noise” already reflecting in the price of the companies. These attractive valuations give managers the ability to buy into companies which they believe will deliver an attractive return going forward.

A quantitative model which Allan Gray utilise suggests that the JSE All Share Index’s average annualised return over the next 4 years, should be in line with inflation + 5%. The last time their quantitative model suggested such value in the local market was 2009 at the height of the Global Financial Crisis. The period of low returns in the local market since 2015 has led way for attractive valuations which are expected to lead to real returns going forward.

With selective stock picking some active managers should be able to deliver an attractive return over and above the market, which has traditionally been the case in previous investment cycles.

The investment case for investing in growth assets is particularly strong at this point in time. Historically returns following valuations such as that which we currently see, can be followed by periods of attractive returns as the market starts to price in a better outcome than previously thought.

Stay the course. Seeds of outperformance are sown in uncomfortable times.


Managers remain largely positive on the opportunities in the local stock market as we recover from a low base of poor returns over the past several years. The third quarter saw the JSE contracted after a positive first and second quarter return. With geopolitical risk at elevated levels the risk of volatility remains high. It may be argued that short-term returns may be dependent on events such as a trade war resolution and lower interest rates in South Africa, however with current valuations the long-term outlook remains positive.

“Low starting valuations offer the potential for outsized long-term returns
Unloved parts of the markets present opportunities to seek out high-quality securities tainted by widespread pessimism and trading at unjustly low prices. While it may take time for the market to realise mispriced value, patient investors stand to be handsomely rewarded. In fact, times of maximum pessimism have historically proven to be the best times to buy.

We believe that current conditions warrant the reduction of cash in our funds by buying attractively priced securities. By applying our process consistently to ensure rational decision-making and careful risk management, we believe we can extract compelling long-term returns at lower levels of risk.”
Anet Ahern CEO: PSG Asset Management Prudential Fund Managers


The Trump effect took its toll on markets in the third quarter with heightened trade war sentiment weighing on an already skittish global market. The US Federal reserve continued to lower interest rates during the quarter which is a positive for growth assets such as equities. There appears to be positive sentiment around the potential for global growth over the next 2 years, however the outlook continues to change each quarter on the back of geopolitical events.

Global markets remain frustrated by the constant headwinds that follow from the Trump effect. The uncomfortable knock on effect from the heightened volatility in global markets is the ability for managers to buy into companies at lower valuations. This “pain trade” phase continues to frustrate investors and asset managers.

The MSCI World equity gained 0.66% over the quarter. The MSCI World Index lagged the US market due to a sell-off in Europe and Emerging Markets.

The graph below represents the World Equity Index over 5 years in dollar terms.

*Performance as of 03/10/2019


Since coming into office Trump has repeated caused volatility in the global markets, for better or for worse. The “ageing bull market”, “Brexit”, “lower global growth forecasts” and “the US interest rate cycle” have been factors which have added to uncertainty around global markets however they have to differing degrees, become priced into the market. In other words, its no longer an uncertainty.

There are positive points to note about the global market. There are pockets of value in areas such as the UK, emerging markets and some US listed stocks. A low global interest rate environment suggests that global equities are more attractive than sitting in cash in a foreign currency account as well as most bond markets in the developed world. Valuations in non-US global equities appear to be attractive for investors who have the patience to buy and hold.

The negative points commonly relate in one way or another to the actions of Trump and his questionable foreign policies. Investors raise the question as to whether they should be worried about the effect that he can have on their investments?

During times of geopolitical uncertainty, it’s important to stay grounded in our long-term objective. Fund managers have processes in place to ensure that they use a tried and tested investment philosophy which uses fundamental analysis to make investment decision. This helps them to stave away from their emotions in relation to market events which can lead to poor decisions and bad outcomes.

The graph below shows the performance of one of the most well-known technology companies in the world. Apple needs no introduction, however its worth noting that since its listing in 1980 the company has grown by over 44 400%. It has done this through a number of global recessions and through numerous periods of global uncertainty.

Source: Foord

The graph shows the numerous falls over time. Most of which are over a 40% decline with the highest fall being over 90%. Investing in great companies through quality managers over the long-term, investors are able to draw comfort from the ability of both the companies and the managers to deliver returns despite the Trump effect or slowing global growth.

The uncomfortable shock events such that drives short-term market volatility such as that which we experienced in the third quarter of 2019 will become less significant over time as long as investors are prepared to stay the course.


Managers have become increasingly positive on non-US equities due to the valuation gap. Value managers remain underweight the US while some growth managers remain positive on the US despite expensive valuations.

There are a number of positive outcomes that can add to both global growth and global market returns should there be a willingness by politicians and policy makers around the world. Outcomes such as a trade war resolution, continued lowering of US interest rates (which is expected) and cohesive economic stimulus in the EU could result in much needed market stability. It is expected that Trump would need to dial down his signature disruptive tendencies and come to a deal with the likes of China in response to the trade war as these key issues would likely be held against him in the upcoming US election.

Investors should be prepared for volatile returns going forward despite the opportunities that the managers have identified.