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THE NEW WORLD ORDER INVESTMENT OUTLOOK 2019 - INVESTMENT GROUP - Old Mutual Investment ...
THE NEW
WORLD ORDER
INVESTMENT
OUTLOOK 2019
  INVESTMENT GROUP
THE NEW WORLD ORDER INVESTMENT OUTLOOK 2019 - INVESTMENT GROUP - Old Mutual Investment ...
UPFRONT

01   Message from Khaya Gobodo                       04   About the authors
02   Executive summary
     2019 INVESTMENT OUTLOOK

 FEATURES

06   The four things to consider when                34   Red China is the world's new green leader?
     investing in 2019                                    JON DUNCAN, HEAD OF RESPONSIBLE INVESTMENT
     HYWEL GEORGE, DIRECTOR OF INVESTMENTS
                                                     38   Living annuities to come under pressure in
10   On the fast track                                    below-average return environment
     FRANK SIBIYA, PORTFOLIO MANAGER                      BRIAN VAMBE, INVESTMENT PROFESSIONAL AT MARRIOTT

14   Should you be selling listed property?          42   Food security adds to the investment
     EVAN ROBINS, PORTFOLIO MANAGER                       appeal of global agriculture
                                                          CHRIS POTGIETER, HEAD OF OLD MUTUAL WEALTH
18   What could drive a bout of bullish yield             PRIVATE CLIENT SECURITIES, TREASURY & FIDUCIARY

     curve flattening in the new year?
     WIKUS FURSTENBERG, PORTFOLIO MANAGER            46   Life coaching for wealth clients
     AND HEAD OF INTEREST RATE PROCESS                    KERRIN LAND, MANAGING DIRECTOR OF
                                                          OLD MUTUAL WEALTH

22   2019: Boom, bust & supercycle revival or
     something new?                                  48   How millennials are changing the future of
     IAN WOODLEY, PORTFOLIO MANAGER                       financial services
                                                          ELIZE BOTHA, MANAGING DIRECTOR OF
                                                          OLD MUTUAL UNIT TRUSTS
26   ESG becomes a private equity priority
     PAUL BOYNTON, MANAGING DIRECTOR OF
     OLD MUTUAL ALTERNATIVE INVESTMENTS

30   Water is the new oil
     THEO VAN DER VEEN & HANNAH YOUNG, UFF AFRICAN
     AGRI INVESTMENTS
THE NEW WORLD ORDER INVESTMENT OUTLOOK 2019 - INVESTMENT GROUP - Old Mutual Investment ...
MESSAGE FROM THE MD                              1

As investment managers, we have an opportunity to make a real difference in people’s lives.
We need to constantly be aware of the responsibility placed on us by those South Africans
entrusting us with their wealth and savings.

                          Most of these savings are customers’           investor confidence – a key ingredient for
                          primary source of income after retirement      an economic recovery.
                          or their only safety net for an emergency.
                                                                         A recovery and the stabilisation of markets
                          As such, we need to bring our skills to
                                                                         will take time and our clients need to steel
                          bear in identifying and interpreting the
                                                                         themselves for further short-term volatility.
                          impact of long-term socio-economic,
                                                                         However, as is evidenced by our extensive
                          technological and political shifts that are
                                                                         research into the long-term performance of
                          taking place globally and locally – and
                                                                         asset classes, the stock market will inevitably
                          determining how these will impact the
                                                                         experience periods of underperformance.
                          investment environment.
                                                                         Over time, however, stock market returns
                          While keeping our focus on long-term           become less volatile and, as history has
                           outcomes, we need to navigate the             shown, continue to offer the best way to
                                  short term. With this in mind, I       grow your wealth over the long term, so
                                    know it has been a particularly      remaining invested through the volatility is
                                     challenging year for investors,     key to achieving our investment goals.
                                      with 2018 on track to being
                                                                         The range of topics covered in this
                                        the most volatile year in
                                                                         Investment Outlook for 2019 highlights the
                                         the stock market since the
                                                                         diverse issues our investment professionals
                                         crash of 2008.
                                                                         grapple with daily, especially as it relates
                                          The local market volatility,   to the key long-term issues we should all
                                          coupled with a low             consider. While we are not able to predict
                                           growth environment,           what will happen in the year ahead, this
                                           political uncertainty         publication does raise the questions that
                                            and a deteriorating          you need to be asking in 2019 and beyond.
                                             economic outlook, is
                                                                         To deliver on these priorities, it is important
                                             unlikely to change
                                                                         that we understand our environment, the
                                              in the short term as
                                                                         short- and long-term impacts of events and
                                              we head into the
                                                                         how we can best interpret these to deliver
                                               national elections
                                                                         the optimal outcome for our customers.
                                               in 2019. We remain
                                                                         That is what this publication is about.
                                               hopeful that, post
                                               what will be a            Enjoy the read!
                                               pivotal election,
                                               we see greater            Regards
                                               policy certainly and      KHAYA GOBODO
                                               a resultant boost         MANAGING DIRECTOR:
                                               in business and           OLD MUTUAL WEALTH & INVESTMENTS
THE NEW WORLD ORDER INVESTMENT OUTLOOK 2019 - INVESTMENT GROUP - Old Mutual Investment ...
2        EXECUTIVE SUMMARY

                              4 THINGS TO CONSIDER                line with low-risk cash over the
                              WHEN INVESTING IN 2019              five-year period. Conditions
                              Investment success in 2019          for property companies are
                              will primarily depend on            currently very difficult, but it’s
                              four factors: managing the          not all bad news and investors
                              fee load on investors by            shouldn’t be too quick to
                              including passive investments       dismiss the sector.
                              in a portfolio mix; tapping
                                                                  LIFE COACHING FOR
                              alternative assets for market-      WEALTH CLIENTS
                              beating long-term returns,
                                                                  At a time when social
                              benefiting from integrating
                                                                  responsibility seems to be
                              ESG into everything we do and
                                                                  growing and the wealthy are
                              ensuring that we harness the
                                                                  looking at leaving a legacy that
                              power of artificial intelligence.
                                                                  goes beyond their families to
                              ON THE FAST TRACK                   include their communities,
                                                                  countries and the world, using
                              Due to four main drivers –
                                                                  a life coaching approach to
                              regulations, performance
                                                                  help high income clients
                              pressures, media and
                                                                  manage their wealth has never
                              research advances, as well as
                                                                  been more relevant.
                              technological progress – index
                              investing has experienced           CLOUDS SET TO LIFT ON
                              monumental popularity in the        FISCAL CONSOLIDATION
                                                                  In anticipation of interest

     INVESTMENT OUTLOOK 2019
                                                                  rates rising, the market has

    EXECUTIVE
                                                                  already priced in a bearish
                                                                  yield curve flattening where
                                                                  short-term bond yields rise
                                                                  faster than those at the
                                                                  long end. This means the

    SUMMARY
                                                                  focus now shifts to the next
                                                                  signif icant bond market
                                                                  yield curve adjustment, likely
                                                                  to be a bullish yield curve
                                                                  flattening. The potential
                                                                  drivers of this shift include the
                                                                  clouds lifting on SA’s f iscal
                              past three to five years. And       consolidation, US Treasury
                              with unrelenting innovations in     market yields approaching
                              factor investing, ESG-focused       our fair value estimate,
                              indices and multi-asset class       the rand depreciating to
                              index investing, its growth is      an oversold level, a strong
                              expected to continue.               disinflationary backdrop
                                                                  and reduced foreign investor
                              SHOULD YOU BE SELLING
                                                                  holdings of SA government
                              LISTED PROPERTY?
                                                                  bonds.
                              This perennial top performing
                              asset class was one of the          THE NEW NORMAL FOR
                              worst performing asset classes      THE RESOURCES SECTOR
                              over a three-year period to the     If the global economy avoids
                              end of December 2018 and has        a downturn, decent ongoing
                              only been able to perform in        demand growth will mean that

OLD MUTUAL INVESTMENT GROUP
THE NEW WORLD ORDER INVESTMENT OUTLOOK 2019 - INVESTMENT GROUP - Old Mutual Investment ...
EXECUTIVE SUMMARY                    3

prices for most commodities          shrouded by the short-term,
will have to increase to induce      very raucous noise?
new capacity to be built,
providing the mining houses          DO WE NEED TO
with a nice boost to the
                                     REWRITE THE BOOK FOR
                                     MILLENNIALS?
bottom line.
                                     Millennials are driving the new
ESG BECOMES A PRIVATE                world order and the financial
EQUITY PRIORITY                      services sector will be no
More and more private equity         exception, as millennials view
managers, particularly in Africa,    their money and investments
are putting environmental,           as powerful tools for changing
social and governance (ESG)          the world. Financial services
factors centre stage in their        providers will have to shift
investment decision-making           their approach and mindset to
because these factors can and        tap into this rapidly emerging
do make a tangible difference.       youth market – but not at the
As these are mostly closed-          expense of their other clients.
ended funds with a limited
number of investments,
                                     FOOD SECURITY ADDS
                                     TO THE INVESTMENT
the fund manager has real
                                     APPEAL OF GLOBAL
scope for influence. As well         AGRICULTURE
as a tool to mitigate risk and
                                     The world is facing a growing
provide downside protection,
                                     shortage of food supply
managers are increasingly
                                     primarily due to declining
embracing the upside
                                     arable land and a water
potential of investing in
                                     shortage. Other factors,
sustainable businesses.
                                     such as the reduction of
WATER IS THE NEW OIL                 waste and the application
                                     of smart technologies to
Without rapid and practical
                                     improve productivity, present
action, the effects of climate
                                     opportunities to address
change will quickly translate
                                     some of this shortfall. All of
into catastrophic water
                                     these present a growing and
insecurity – and agricultural
                                     an attractive investment
operations are extremely
                                     opportunity.
vulnerable to water-related
risk. It is essential that African   LIVING ANNUITIES TO
leaders, governments and             TAKE STRAIN
institutions collaborate
                                     A drawdown rate of 6% in
efficiently to achieve better
                                     retirement is common in the
water management in the
                                     market place but Marriott’s
current resource-scarce world.
                                     research shows that, at that
RED CHINA IS THE                     rate, almost half of retirees
WORLD’S NEW GREEN                    would have depleted their
LEADER?                              capital within 30 years. This
Will sensible ideas about green      suggests many living annuities
growth find a political voice in     will come under pressure in the
both the Eastern, particularly       years ahead – and that retirees
China, and Western economies         will have to be particularly
in 2019 or will this important       careful in how much income
set of long-term signals remain      they draw.

                                                                                             Credit: Adrian Trinkaus
                                                                               THE NEW WORLD ORDER 2019
THE NEW WORLD ORDER INVESTMENT OUTLOOK 2019 - INVESTMENT GROUP - Old Mutual Investment ...
4        ABOUT THE AUTHORS

             ABOUT THE
             AUTHORS
               THE FOUR THINGS                                    WHAT COULD DRIVE A
               TO CONSIDER WHEN                                   BOUT OF BULLISH YIELD
               INVESTING IN 2019                                  CURVE FLATTENING IN
               HYWEL GEORGE, DIRECTOR OF                          THE NEW YEAR?
               INVESTMENTS                                        WIKUS FURSTENBERG,
               Hywel is responsible for delivering investment     PORTFOLIO MANAGER AND HEAD
               performance across our listed asset                OF INTEREST RATE PROCESS
               management boutiques as well as nurturing          Wikus manages a range of institutional and
               and developing new investment products.            retail fixed income portfolios at Futuregrowth
               His experience spans 30 years in leading           Asset Management, which include income,
               global institutional and private client asset      core bond and flexible interest rate funds. He
               management companies in Europe and the             also heads up the Futuregrowth Interest Rate
               Middle East.                                       team.

               ON THE FAST TRACK                                  2019: BOOM, BUST &
               FRANK SIBIYA, PORTFOLIO                            SUPERCYCLE REVIVAL OR
               MANAGER                                            SOMETHING NEW?
               Frank is responsible for managing local            IAN WOODLEY, PORTFOLIO
               and international tracker funds within the
                                                                  MANAGER
               Customised Solutions team, which manages
                                                                  A multi-award winning portfolio manager,
               over R92 billion in their indexation capability.
                                                                  Ian joined Old Mutual Equities in 2011 and is
               He specialises in index investing in Africa
                                                                  responsible for assessing the diversified mining
               and the emerging markets and has a strong
                                                                  companies and non-mining companies such
               background in mathematics and statistics.
                                                                  as steel, forestry and paper. He is also the
                                                                  portfolio manager for the Old Mutual Mining
                                                                  and Resources Fund (unit trust).
               SHOULD YOU BE SELLING
               LISTED PROPERTY?
               EVAN ROBINS, PORTFOLIO                             ESG BECOMES A PRIVATE
               MANAGER                                            EQUITY PRIORITY
               Evan manages Old Mutual’s institutional and        PAUL BOYNTON, MANAGING
               unit trust SA Quoted Property portfolios. He
                                                                  DIRECTOR OF OLD MUTUAL
               joined the MacroSolutions boutique in 2012
                                                                  ALTERNATIVE INVESTMENTS
               as the property portfolio manager and has
                                                                  Paul has been heading up Old Mutual
               experience in a wide range of roles in the asset
                                                                  Alternative Investments, one of the largest
               management industry, particularly in equity
                                                                  private alternative investment managers in
               research, portfolio management and strategy.
                                                                  Africa, since 2004. Having joined Old Mutual
                                                                  in 1995, his entire career has been involved in
                                                                  investment and capital markets.

OLD MUTUAL INVESTMENT GROUP
THE NEW WORLD ORDER INVESTMENT OUTLOOK 2019 - INVESTMENT GROUP - Old Mutual Investment ...
ABOUT THE AUTHORS                    5

WATER IS THE NEW OIL                              FOOD SECURITY ADDS TO
THEO VAN DER VEEN & HANNAH                        THE INVESTMENT APPEAL
YOUNG, UFF AFRICAN AGRI                           OF GLOBAL AGRICULTURE
INVESTMENTS                                       CHRIS POTGIETER, HEAD OF
Theo has been in the fresh produce trading        OLD MUTUAL WEALTH PRIVATE
and distribution global industry since 1984.      CLIENT SECURITIES, TREASURY &
At UFF he is responsible for relationship         FIDUCIARY
management with agricultural operators and        Chris leads an experienced team with a strong
their clients.                                    track record of success to provide and manage
Hannah is a qualified environmental lawyer        bespoke investment portfolios for private
who has been engaged with environmental           clients, trusts, companies and pension funds.
and social issues across the African continent    In his esteemed career, Chris has fulfilled
for more than 10 years. She is UFF’s ESG lead,    senior and diverse roles within a number of
responsible for the ESG goals and performance     investment businesses.
of the individual farms and funds.
                                                  LIFE COACHING FOR
                                                  WEALTH CLIENTS
RED CHINA IS THE                                  KERRIN LAND, MANAGING
WORLD'S NEW GREEN                                 DIRECTOR OF OLD MUTUAL
LEADER?                                           WEALTH
JON DUNCAN, HEAD OF                               Kerrin’s team implement planning tools and
RESPONSIBLE INVESTMENT                            industry leading solutions to assist financial
With over 20 years’ experience in the field of    planners in guiding their clients on their
sustainability research and engagement, Jon       wealth journey. She previously spent 20 years
leads the Responsible Investment programme        with Old Mutual Investment Group, where she
at Old Mutual. His focus is on driving the        held various technical and leadership roles
systemic integration of material ESG issues       and played a key role in developing some of its
across Old Mutual.                                most innovative offerings.

LIVING ANNUITIES TO                               HOW MILLENNIALS ARE
COME UNDER PRESSURE                               CHANGING THE FUTURE
IN BELOW-AVERAGE                                  OF FINANCIAL SERVICES
RETURN ENVIRONMENT                                ELIZE BOTHA, MANAGING
BRIAN VAMBE, INVESTMENT                           DIRECTOR OF OLD MUTUAL UNIT
PROFESSIONAL AT MARRIOTT                          TRUSTS
Brian is responsible for both primary and         Elize and her team assist retail investors
secondary research in the securities market,      in preserving and growing their wealth.
as well as monitoring broad macro-economic        This includes partnering with Old Mutual
variables. He has successfully completed          Investment Group to ensure a strong specialist
his level 1 CFA exam and is a member of the       investment capability, as well as providing
Investment Analysts Society of Southern Africa.   clients with the best possible service.

                                                                                    THE NEW WORLD ORDER 2019
THE NEW WORLD ORDER INVESTMENT OUTLOOK 2019 - INVESTMENT GROUP - Old Mutual Investment ...
6        INVESTING IN 2019

FOUR BIG
THINGS TO
CONSIDER
WHEN
INVESTING
IN 2019

“It is much easier after the event to sort the relevant from the irrelevant signals. After the event, of
course, a signal is always crystal clear.” – Nate Silver, The Signal and the Noise. Identifying the relevant
signals from the noise has been key to successful investing in 2018, and will be again in 2019.

                              T
                                      hat is a fundamental part of our job         However, with markets having been strong,
                                      as professional investment managers.         assets under management in active funds have
                                      Actively helping our clients do the same     also grown (see Figure 2) and we believe there
 WRITTEN BY
                                      in their role is also fundamental to our     is still a place for active investing to make up
 HYWEL GEORGE ,
 DIRECTOR OF                          industry; striking a true partnership        a decent component of the mix in a portfolio.
 INVESTMENTS                  between asset owners, their consultants and asset    Passive investing (i.e. tracking an index) comes
                              managers is the sensible way forward.                with its own risks and to outperform under
                                                                                   certain market conditions, history has shown
                              As such, we humbly offer four thoughts that
                                                                                   the benefits of fundamental active investing. For
                              we believe asset owners should be applying
                                                                                   instance, with just seven stocks making up 50%
                              themselves in 2019:
                                                                                   of the JSE, that level of concentration, should
                              01/ HAVE SOME PASSIVE                                things turn, would be a big risk. Active managers

                              IN THE MIX                                           can help navigate this.

                              Passive investing continues to gain support          Thus a win-win situation would be a
                              and will remain an important part of the             combination of the two, leading to better
                              investment landscape going forward. As Figure 1      outcomes for investors, because the passive
                              shows, within US equity investments, almost          investments would enable investors to manage
                              US$1 trillion has flowed into passive funds, while   their fee load while the stockpicking of active
                              US$1 trillion has flowed out of active investing –   managers should continue to add value relative
                              that’s a US$2 trillion swing in investment flows.    to the market.

OLD MUTUAL INVESTMENT GROUP
THE NEW WORLD ORDER INVESTMENT OUTLOOK 2019 - INVESTMENT GROUP - Old Mutual Investment ...
INVESTING IN 2019                                                                        7

                                                            FIGURE 1: GROWTH OF PASSIVE – DOMESTIC US EQUITY CUMULATIVE
                                                            FLOWS ($BN)

                                                                  1000

                                                                                                                                                                                                                                                         894
                                                                   800

                                                                   400

                                                                     0

                                                                  -400

                                                                  -800                 Passive
                                                                                                                                                                                                                                                         -836
                                                                                       Active
                                                                  -1000

                                                                              Aug 07

                                                                                       Feb 08

                                                                                                Aug 08

                                                                                                         Feb 09

                                                                                                                  Aug 09

                                                                                                                           Feb 10

                                                                                                                                    Aug 10

                                                                                                                                             Feb 11

                                                                                                                                                      Aug 11

                                                                                                                                                               Feb 12

                                                                                                                                                                        Aug 12

                                                                                                                                                                                 Feb 13

                                                                                                                                                                                          Aug 13

                                                                                                                                                                                                   Feb 14

                                                                                                                                                                                                            Aug 14

                                                                                                                                                                                                                     Feb 15

                                                                                                                                                                                                                              Aug 15

                                                                                                                                                                                                                                       Feb 16

                                                                                                                                                                                                                                                Aug 16
                                                                                                                                                           Sources: Old Mutual Investment Group; Morgan Stanley Research

                                                            FIGURE 2: ACTIVE STILL GROWING – GLOBAL ASSETS UNDER MANAGEMENT
                                                            (IN US$ TOTAL RETURN)

                                                             35
                                                                                                                                                                                                                              31
                                                            30
                                                                                                                                                                                 29                   29
                                                                                                                                                           27
                                                             25                                                                       23                                                                                               ACTIVE            +31%

                                     Credit: Bud Helisson
                                                                                             20                   20
                                                            20        18                                                                                                                                                      25
02/ LOOK FOR RETURNS                                                                                                                                                             24                    23
ELSEWHERE                                                    15
                                                                                                                                       20                      22

During 2019, investors will also need to keep                                                   17                17
adding real, alternative sources of return outside           10           16

of plain vanilla equity and bond portfolios. These
would be real assets, including infrastructure               5                                                                                                                                                                         PASSIVE           +202%
                                                                                                                                                                                                        6                     7
investments, real estate and agriculture, which                                                                                                                                    5
                                                                                                3                  3                     4                     4
are popular globally, as well as private equity                           2
                                                             0
and hedge funds. Figure 3 shows the growth in                        2009                 2010                    2011               2012                  2013                  2014               2015              2016 Q3
global assets under management invested in
these alternative assets.                                                                                                                                                 Source: McKinsey Performance Lens Global Growth Cube

Global research into institutional investor
perceptions of alternative assets shows                     FIGURE 3: ALTERNATIVE SOLUTIONS
that hedge fund returns have disappointed                   OF RETURN – GLOBAL AUM OF KEY                                                                                                                                     7.3
                                                            ALTERNATIVE ASSET CLASSES
investors, Figure 4 on the following page
showing that with 64% of investors unhappy                                                                                                                                       6.2
with their hedge fund returns. However, 71%                                                                                                                                                                                     2.7
                                                                                                                                    5.2
of the investors were happy with the returns                                                                                                                                      2.1
delivered by their private equity investments. One                                                                                  1.7
needs to be judicious, however, in one’s choices                                       3.2                                                                                                                                      1.8
of these alternative assets.                                                                                                                                                      2.1
                                                                                       1.0                                           1.6
Overseas more than a third of the assets of the
100 largest pension funds are now invested                                             1.1
                                                                                                                                                                                                                               2.9
in alternative assets in some form or another,                                                                                       1.9                                         2.0
whereas in SA alternative investments comprise                                         1.1

a mere 2% of institutional assets. So we have                                      2005                                             2007                                         2011                                          2015
a lot of work to do to increase that exposure
                                                                                                           Hedge fund                                 Private equity                               Real assets
locally to give investors exposure to the long-
term, premium real returns they can offer.
                                                                                  Sources: McKinsey Performance Lens Global Growth Cube, Preqin; HFR; McKinsey Private Equity database

                                                                                                                                                                                               THE NEW WORLD ORDER 2019
THE NEW WORLD ORDER INVESTMENT OUTLOOK 2019 - INVESTMENT GROUP - Old Mutual Investment ...
8                                            INVESTING IN 2019

  FIGURE 4: GLOBAL AUM OF KEY ALTERNATIVE ASSET CLASSES – INSTITUTIONAL                                                                                             03/ INTEGRATE ESG INTO
  INVESTOR PERCEPTIONS OF ALTERNATIVE ASSET CLASSES, 2013-16                                                                                                        EVERYTHING YOU DO
                                                                                                                                                                    People’s perceptions are shifting, with many
                                      HEDGE FUNDS (%)                                        PRIVATE EQUITY (%)                                                     becoming more mindful of sustainable
                                                                                                                                       5
                                                                                                                                                                    investing. In fact, a 2017 Schroders Investment
                                       16                                                       11          8             6
                                                                                                                                                                    Study showed that 78% of respondents said
                                                   35         33
                                                                                                                                                                    that sustainable investing has become more
                                                                            64                                                                                      important to them in the past five years.
                                                                                                                          44          73
                                                                                                           75                                                       With some US$80 trillion global assets under
                                       63                                                      78
                                                                                                                                                                    management, the investment industry has the
                                                   57         58
                                                                                                                                                                    greatest potential to influence decisions and
                                                                                                                                                                    practices relating to sustainability. Figure 5 shows
                                                                            30                                                                                      that inflows into ESG funds have taken off, with
                                                                                                                          30
                                        21                                                                                            24
                                                                                                13         17                                                       an almost exponential rise in flows over the past
                                                   8          9             3
                                                                                                                                                                    few years.
                                      2013        2014       2015       2016                  2013        2014        2015            2016

                                             Fallen short of expectations          Met expectations         Exceeded expectations
                                                                                                                                                                    The decision to invest in funds that have a clear
                                                                                                                                                                    preference for those companies that focus on
Source: https://www.msci.com/end-of-day-data-search                                                                                                                 positive environmental, social and governance
                                                                                                                                                                    principles is made easier by the fact that there
                                                                                                                                                                    appears to be no trade-off between making
  FIGURE 5: GLOBAL FLOWS INTO ESG FUNDS ARE GAINING MOMENTUM –                                                                                                      sustainability an investment priority and
  INVESTMENT FUNDS INCORPORATING ESG FACTORS 1995-2016                                                                                                              achieving competitive returns. Figure 6 shows
                                                                                                                                                                    that investing in a global ESG strategy would
                                     3000                                                                                                  1200
                                                                                                                                                                    have added significant alpha over time.

                                     2500                                                                                                  1000                     This makes intuitive sense because integrating
    TOTAL NET ASSETS (US BILLIONS)

                                                                                                                                                                    ESG into investment decisions means you
                                                                                                                                                  NUMBER OF FUNDS

                                     2000                                                                                                  800                      generally invest in quality companies that make
                                                                                                                                                                    better long-term decisions and thus deliver more
                                     1500                                                                                                  600                      sustainable returns over time.

                                                                                                                                                                    This is particularly true in emerging markets and
                                     1000                                                                                                  400
                                                                                                                                                                    South Africa where the quality of a company
                                                                                                                                                                    is often informed by standards of corporate
                                      500                                                                                                  200
                                                                                                                                                                    governance and other ESG considerations that
                                                                                                                                                                    affect a company’s ability to deliver in the long term.
                                       0                                                                                                   0
                                                                                                                                                                    This is evident in the outperformance of an MSCI
                                                           Number of Funds              Total Net Assets (US billions)
                                                                                                                                                                    EM ESG Index versus an MSCI EM Index (see
Source: US SIF Foundation
                                                                                                                                                                    Figure 7) and in South Africa where an ESG version

  FIGURE 6: ESG STRATEGY WOULD HAVE DRIVEN 18% EXCESS ALPHA –
  RELATIVE PERFORMANCE: HIGH THIRD VS LOW THIRD BY ESG SCORE

               140                                                                                                                                                                                    AS OF 10/31/16

               130

               120

                   110

             100

                     90

                     80

                                      2004       2005          2006              2007         2008           2009              2010            2011                  2012       2013        2014       2015

                                                                                        Environmental           Overall         Social            Corp. Governance

Source: Thomson Reuters, BofA ML US Equity & Quant Strategy

OLD MUTUAL INVESTMENT GROUP
INVESTING IN 2019                    9

                                                                                                                                                                                                                                                             the way we work and conduct ourselves in all
            250
   FIGURE 7: MSCI EMERGING MARKETS VS MSCI EMERGING MARKETS                                                                                                                                                                                                  aspects of our lives over the coming decade.
   ESG LEADERS(US$) TO END DECEMBER 2018
                                                                             MSCI EMERGING ESG LEADERS                                                                  MSCI EMERGING MARKETS                                                                From an investment perspective, the way
           200                                                                                                                                                                                                                                               asset managers integrate AI into the way they
                                                                                                                                                                                                                                                             manage money is likely to be fundamental to
                                                                                                                                                                                                                                                             their future success. As such, one of our biggest
 PRICE INDEXED

                 150                                                                                                                                                                                                                                         work streams in 2018 (and into 2019) has been
                                                                                                                                                                                                                                                             focused on embedding AI into everything we
                                                                                                                                                                                                                                                             do as an asset manager.
             100
                                                                                                                                                                                                                                                             There’s no doubt AI is a new toolbox and it will
                                                                                                                                                                                                                                                             facilitate greater productivity and insight from
                                                                                                                                                                                                                                                             humans. We don’t believe it will be a case of
                 50                                                                                                                                                                                                                                          machine-only, but expect the winners to be
                                                                                                                                                                                                                                                             those who optimise the relationship between
                                                                                                                                                                                                                                                             human and machine.
                  0
                       Sep 07

                                Mar 08

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                                                                                                                                                                                                                                                             It is an exciting time and we are focused on
                                                                                                                                                                                                                                                             five key areas where AI will directly impact
                                                                                                                                                    Source: https://www.msci.com/end-of-day-data-search                                                      the way we manage our clients’ assets:

                                                                                                                                                                                                                                                              1.   The data asset managers need to source
  FIGURE 8: SA ESG CUMULATIVE RETURNS VS JSE SWIX                                                                                                                                                                                                                  will evolve from the current news scrapes,
                                                                                                                                                                                                                                                                   management emotion measures and
                            TO END SEP 2018
                 240                                                                                                                                                                                                                                               satellite imagery, and our ability to clean
                                                                                                                                                                                                                                                                   and curate that data will be key.
                 220

                                                                                                                                                                                                                                                              2.   AI will help asset managers interpret that
                 200
                                                                                                                                                                                                                                                                   data and look for themes, or indicators
                 180                                                                                                                                                                                                                                               that uncover new ideas.

                 160
                                                                                                                                                                                                                                                              3.   AI will help asset managers design better
                                                                                                                                                                                                                                                                   stock and sector filter screens to identify
                 140
                                                                                                                                                                                                                                                                   those companies that have attractive
                 120                                                                                                                                                                                                                                               investment characteristics.
                 100
                                                                                                                                                                                                                                                             4.    AI will help with portfolio construction
                       Sep 12

                                         Mar 13

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                                                                                                                                                                                            Mar 17

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                                                                                                                                                                                                                                                                   and risk management, helping identify
                                                                                                                                                                                                                                                                   risk clusters that were previously hidden.
                                            Responsible Investment Equity Index Fund                                                                               ALSI SWIX - Parent Index
                                                                                                                                                                                                                                                             5.    AI will help in stock-specific fundamental
                                                                                                                                                                           Source: Old Mutual Customised Solutions
                                                                                                                                                                                                                                                                   research, finding anomalies that beg
                                                                                                                                                                                                                                                                   questions, and helping dig into issues
of the JSE SWIX Index added alpha over the past

                                                                                                                                                                                                     "
                                                                                                                                                                                                                                                                   that highlight the need to gather more
five years (see Figure 8).
                                                                                                                                                                                                                                                                   information.
This is not just about investing in those
                                                                                                                                                                   WITH SOME                                                                                 In essence, it will come down to how an asset
companies that meet the ESG criteria as set out
by the index, but requires the asset managers’                                                                                                                     US $80 TRILLION                                                                           manager uses the data to search for those
ongoing commitment to challenge companies                                                                                                                          GLOBAL                                                                                    hidden themes that add value to a portfolio
                                                                                                                                                                                                                                                             and lead to more consistent outcomes for
to make the best long-term decisions to better                                                                                                                     ASSETS UNDER                                                                              clients.
comply with ESG principles. This confirms that
by investing in the right way, asset managers can
                                                                                                                                                                   MANAGEMENT,
have a positive impact on communities and the                                                                                                                      THE INVESTMENT                                                                            THE BOTTOM LINE
environment, while also delivering alpha (returns                                                                                                                  INDUSTRY HAS                                                                              We believe that investment success in 2019
                                                                                                                                                                                                                                                             will partly depend on the above four factors.
in excess of their benchmark).                                                                                                                                     THE GREATEST                                                                              One can manage the fee load on investors by
04/ UNDERSTAND AND                                                                                                                                                 POTENTIAL TO                                                                              including passive investments in a portfolio
INTEGRATE ARTIFICIAL                                                                                                                                               INFLUENCE                                                                                 mix, tap alternative assets for market-beating
INTELLIGENCE INTO                                                                                                                                                  DECISIONS AND                                                                             long-term returns, benefit from integrating
INVESTMENT DECISIONS                                                                                                                                               PRACTICES
                                                                                                                                                                                                                                                             ESG into everything we do, and ensure that we
                                                                                                                                                                                                                                                             harness the power of artificial intelligence.
While there may be some scepticism as to the                                                                                                                       RELATING TO
extent that artificial intelligence (AI) will change
                                                                                                                                                                   SUSTAINABILITY.

                                                                                                                                                                                                     "
our day-to-day lives, it could well turn out to have
the most profound and fundamental impact on

                                                                                                                                                                                                                                                                               THE NEW WORLD ORDER 2019
10            ON THE FAST TRACK

ON THE
FAST
TRACK
We look at the evolution of
passive investing – which we
term as indexation – over the
past decade and assess whether
its exceptional growth over the
last three years is expected to
continue.

WRITTEN BY
F R A N K S I B I YA ,
PORTFOLIO
MANAGER

                                  Credit: Gaelle Marcel
OLD MUTUAL INVESTMENT GROUP
ON THE FAST TRACK                           11

                                                                                                                                                                                                                                                                                      ■■ Greater transparency – a greater need to
  FIGURE 9: 10-YEAR GROWTH IN INDEX INVESTMENT STRATEGIES
                                                                                                                                                                                                                                                                                         understand the drivers of risk in an investment
  (ASISA SA GENERAL EQUITY AND LARGE CAP EQUITY)
                                                                                                                                                                                                                                                                                         strategy
      800%
                                                                                                                                                                                                                                                                                      ■■ Cost efficiency – ensuring that the costs
      700%
                                                                                                                                                                                                                                                                                         are justified by the level of value-add being
      600%
                                                                                                                                                                                                                                                                                         generated by the asset manager
      500%
                                                                                                                                                                                                                                                                                      ■■ Consistency – strategies that deliver
      400%
                                                                                                                                                                                                                                                                                         consistent performance, especially relative to a
      300%
                                                                                                                                                                                                                                                                                         predefined benchmark.
      200%

      100%
                                                                                                                                                                                                                                                                                      MEDIA AND RESEARCH
         0%                                                                                                                                                                                                                                                                           We live in a world in which Warren Buffet has
                                                                                                                                                                                                                                                                                      publicly backed index investing (see the sidebar
     -100%
                                                                                                                                                                                                                                                                                      titled “A Million-Dollar Bet”). And research
              6/01/08

                        11/01/08

                                   4/01/09

                                             9/01/09

                                                       2/01/10

                                                                 7/01/10

                                                                           12/01/10

                                                                                      5/01/11

                                                                                                10/01/11

                                                                                                           3/01/12

                                                                                                                     8/01/12

                                                                                                                               1/01/13

                                                                                                                                         6/01/13

                                                                                                                                                   11/01/13

                                                                                                                                                              4/01/14

                                                                                                                                                                        9/01/14

                                                                                                                                                                                  2/01/15

                                                                                                                                                                                            7/01/15

                                                                                                                                                                                                      12/01/15

                                                                                                                                                                                                                 5/01/16

                                                                                                                                                                                                                           10/01/16

                                                                                                                                                                                                                                      3/01/17

                                                                                                                                                                                                                                                8/01/17

                                                                                                                                                                                                                                                          1/01/18

                                                                                                                                                                                                                                                                    6/01/18
                                                                                                                                                                                                                                                                                      is continually demystifying and re-defining
                                                                                                                                                                                                                                                                                      the source of alpha (see Figure 10). Now, with
                                                       Index Investment Strategies                                                                      Actively Managed Strategies
                                                                                                                                                                                                                                                                                      growing emphasis being placed on factor
Sources: Old Mutual Customised Solutions; Morningstar                                                                                                                                                                                                                                 research and evidencing of how alpha is

I
                                                                                                                                                                                                                                                                                      expected to be diminished, this all translates into
  n the South African retail market indexation                                                                                                                                                                                                                                        growing publicity and popularity for indexation.
  investment strategies have grown by 46%
  p.a. over the last 10 years (see Figure 9). Is this                                                                                                                                                                                                                                 TECHNOLOGY

                                                                                                                                                                                                                             "
  growth likely to be sustained during 2019                                                                                                                                                                                                                                            In today’s world technology has made the
  and what innovative developments can be                                                                                                                                                                                                                                             dissemination of information close to instant,
expected in the passive investment segment of                                                                                                                                     TECHNOLOGY IS                                                                                       which makes it difficult to generate excess
the market going forward?                                                                                                                                                         ALSO PLAYING A                                                                                      returns as before. Technology is also playing a

01 / PASSIVE AGGRESSIVE:                                                                                                                                                          CRITICAL ROLE                                                                                       critical role in reducing costs across multiple
                                                                                                                                                                                                                                                                                      industries, and investors expect this trend
WHY INDEXATION IS SO                                                                                                                                                              IN REDUCING                                                                                         to apply to the investment industry as well.
POPULAR                                                                                                                                                                           COSTS ACROSS                                                                                        Indexation strategies have become particularly
Spurred by an increasing acknowledgement of                                                                                                                                       MULTIPLE                                                                                            ideal vehicles to use in computer-generated
                                                                                                                                                                                                                                                                                      portfolios and advances in technology have
the long-term benefits of low-cost solutions, the                                                                                                                                 INDUSTRIES.

                                                                                                                                                                                                                             "
take-up of indexation is expected to continue                                                                                                                                                                                                                                         allowed for large-scale customisation in
growing at a healthy clip. This increased uptake                                                                                                                                                                                                                                      exchange traded funds (ETFs) that satisfies
can be attributed to the following factors:                                                                                                                                                                                                                                           desired investment outcomes.

THE REGULATORY ENVIRONMENT
The Global Financial Crisis (2008) acted as a
                                                                                                                                                                                  FIGURE 10: THE MORPHING STATE OF ALPHA
catalyst for additional regulatory intervention;
regulatory bodies have since then been
pressuring the investment industry to be more                                                                                                                                                                        Source of                                                          Fama         Mark        Robert
                                                                                                                                                                                                                  Return Unknown                                          CAPM         & French     Carhart     Novy-Marx
cognisant of investment risks. Examples of
                                                                                                                                                                                                                                                                                                     Alpha
                                                                                                                                                                                                                                                                                                                            ALTERNATIVE
this have been Basel 3 and SAM (i.e. Solvency                                                                                                                                                                                                                                            Alpha                              & EQUITIES:
                                                                                                                                                                                                                                                                                                                            ADAPTIVE
Assessment and Management), which                                                                                                                                                                                                                                                                                           BIASES
                                                                                                                                                                                                                                                                                                                  Value
placed greater focus on transparency and risk                                                                                                                                                                                                                                 Alpha                  Value         size
                                                                                                                                                                                                                                                                                                      size      momentum    EQUITIES:
management in the banking and insurance                                                                                                                                                                                                                                                            momentum      quality    CONSISTENT
                                                                                                                                                                                                                                                                                         Value                              BIASES
industries. Within the South African investment                                                                                                                                                                                                                                           size
context the Retail Distribution Review and                                                                                                                                                                                                                                                                                  SMART BETA
                                                                                                                                                                                                                                  Portfolio
the Savings Default Regulation have both                                                                                                                                                                                           return

highlighted the importance of investors being
charged fair and transparent costs.                                                                                                                                                                                                                                           Bulk       Bulk        Bulk         Bulk
                                                                                                                                                                                                                                                                              BETA       BETA        BETA         BETA      INDEXATION

INVESTOR PERFORMANCE PRESSURES.
There has been growing concern about
investment strategies not adding enough value
                                                                                                                                                                                                                                                                              1966       1992        1997         2012
relative to their costs. This concern has been                                                                                                                                                          Prior to
                                                                                                                                                                                                           1966
fuelled by investors being exposed to expensive,
complex investment structures, many of which
have failed to add value over the long term. As a                                                                                                                        Sources: Eugene Fama and Kenneth French, The Cross Section of Expected Stock Returns, Journal of Finance, June 1992; Mark
                                                                                                                                                                         Carhart, On Persistence of Mutual Fund Performance, Journal of Finance, March 1997; Robert Novy-Marx, The Other Side of Value:
result, investors have increasingly prioritised:                                                                                                                         The Gross Profitability Premium, Journal of Financial Economics, April 2013.

                                                                                                                                                                                                                                                                                                             THE NEW WORLD ORDER 2019
12                ON THE FAST TRACK

                                                     02/ WHERE TO FROM
     A MILLION-                                      HERE
     DOLLAR BET
                                                     The pressures detailed above have supported
     In 2007, legendary                              the growth in index investing. And we expect
     investor Warren                                 the following innovations to fuel continued
     Buffett made a US$1 million                     growth in this area:
     bet against Protégé
     Partners that hedge                             FACTOR INVESTING
     funds wouldn't
     outperform an S&P index                         Globally, there has been an increase in the
     fund. Buffet won.                               number of solutions that follow low-cost
                                                     investing strategies, such as smart beta.
     Buffett's choice fund, the
                                                     According to Morningstar, smart beta assets
     Vanguard 500 Index Fund
     Admiral Shares, returned                        under management globally grew from
     7.1% compounded                                 US$280 billion in 2012 to US$999 billion at the
     annually, while the                             end of 2017 – a total increase of 257% over the
     basket of hedge funds                           five-year period. We expect this trend to pick
     his competitor chose                            up in the South African industry. This would
     returned an average of
                                                     appeal to investors who do not desire using
     only 2.2%.
                                                     market cap weighted indices but would still
     Buffett and Protégé                             like to benefit from the reduction in costs.
     Partners originally put
     about US$320,000 each                           ESG INDICES
     into bonds that would
     appreciate to US$1 million
                                                     Broad acceptance of Responsible Investment
     over the course of their                        practices in the market (over 1 200 asset
     wager, but because the                          owners, investment managers and
     bonds appreciated much                          professional service par billionaires have
     faster than expected,                           become signatories of the United Nations-
     they decided to buy
                                                     backed Principles for Responsible Investment
     11 200 Berkshire B shares,
                                                     (PRI)) has translated into strong demand for
     which are now worth
     US$2.22 million.                                sustainability-themed investment products.
                                                     And innovation in the indexation investing
                                                     space in recent years has allowed index-
     Source: Wall Street Journal, https://
     www.wsj.com/articles/only-a-market-
                                                     tracking investment managers to incorporate
     crash-can-stop-warren-buffett-from-             ESG factors into their investment process. And
     winning-this-1-million-bet-1487851203
                                                     so, the market now has on offer low-cost indices

  FIGURE 11: EXISTING ALLOCATIONS TO SMART BETA

           60%

                                                                                                        46%    48%

           40%
                                                                                    36%
                                  32%
                                                                   26%

           20%

             0%
                                   2014                            2015             2016                2017   2018

Source: FTSE Russell: Global Smart Beta Surveys of Asset Owners, 2014-2018

OLD MUTUAL INVESTMENT GROUP
MESSAGE FROM THE MD                            13

                                                                                                            Credit: Joshua Ness

                                                             "
that offer ESG-led mandates and champion                                 IT TAKES A MIXED BAG
Responsible Investment. As at December 2017,                             Today, it would be reasonable to say that
MSCI reported that about US$98 billion of assets       BOTH ACTIVE       the majority of the investment community
is benchmarked against the MSCI ESG indices.           AND PASSIVE       do not see indexation as merely a fad, but

MULTI-ASSET CLASS INDEX INVESTING                      STRATEGIES        rather a useful investment strategy that can

Recent regulatory amendments, known as
                                                       HAVE A ROLE       help investors achieve their goals. If you are
                                                                         still not sure of this, just check out Figure 9
the retirement fund default regulations, have          TO PLAY AND       again. However, as passive/index investing
significant implications for South African             PARTNERING        grows more popular, we don’t think investors
investors. In terms of the regulations, retirement
                                                       WITH THE RIGHT    should give up on active investing. Both active
funds will have to consider “cradle-to-grave”                            and passive strategies have a role to play and
investment goals; they need to assist members          MANAGER
                                                                         partnering with the right manager to find
during both the accumulation phase and the             TO FIND THE       the right balance between the two strategies
retirement phase of their investments in a cost-       RIGHT BALANCE     is key. Investors with a blend of both active
efficient manner, whereas previously they were
required to assist members only during the
                                                       BETWEEN THE       and index investments have the opportunity
                                                                         to both outperform the market index and
accumulation phase. In this context, low-cost life-    TWO STRATEGIES    reduce the risk that they will underperform
staging offerings are growing in importance. And       IS KEY.           the market, all while reducing their total

                                                             "
using a multi-asset class fund is a highly efficient                     investment costs.
and robust solution.

                                                                                         THE NEW WORLD ORDER 2019
14      LISTED PROPERTY
         MESSAGE FROM THE MD

SHOULD YOU
BE SELLING
LISTED
PROPERTY?
From hero to zero. Listed property has fallen
from grace. This perennial top performing asset
class was one of the worst performing asset
classes over a three-year period to the end
of December 2018 and has only been able to
perform in line with low-risk cash over the five-
year period (see Figure 12). Given all this negative
news, it is easy to forget that over a longer period
listed property still comfortably remains one of
the top performers.

                                                       Credit: Jan Romero
OLD MUTUAL INVESTMENT GROUP
LISTED PROPERTY                                      15

D
             oes this recent poor performance                                                         BOND YIELDS ARE NO LONGER LOW
             mean you should run for the
                                                                                                      Listed property yields tend to follow
             hills in 2019? Not so fast… To get
                                                                                                      government bond yields. If yields rise, prices fall.
             some perspective, I look at what’s              E VA N R O B I N S ,
                                                             PORTFOLIO MANAGER
                                                                                                      A couple of years ago there was a substantial
             improved and what hasn’t, and why
                                                                                                      capital risk to listed property prices if global
investors should not be too quick to dismiss the
                                                                                                      and South African bond yields were to rise from
property sector.
                                                                                                      their then historic multiple-decade lows.
01/ WHAT HAS IMPROVED:                                                                                Bond yields in the United States and in
SOME MAJOR CONCERNS                                                                                   South Africa have now risen significantly
HAVE DISSIPATED                                                                                       (see Figure 14 on the next page). Indeed, in
                                                                                                      MacroSolutions we now believe that SA bonds
There are four key non-economic growth related
                                                                                                      are cheap and yields are more likely to fall
concerns we explicitly cautioned clients about
                                                                                                      than rise. Buying listed property now offers the
in the past that have now disappeared. In some
                                                                                                      prospects of an opportunity for capital gain if
cases, they have even turned positive. This creates
                                                                                                      yields fall, and less probability of a loss from
a more favourable valuation and structural
                                                                                                      rising SA bond yields.
environment for the sector.
                                                                                                      THE MARKET IS NO LONGER
THE EXTREME VALUATION OF THE                                                                          UNREALISTICALLY SANGUINE
RESILIENT STABLE IS OVER
                                                                                                      We were of the view that the SA market and
The companies in the Resilient stable, which
                                                                                                      property companies were too backward
comprised over 40% of the listed property
                                                                                                      looking, under-estimating the gravity of future
benchmark at the start of the year, were much too
                                                                                                      economic and property deterioration.
expensive. Given their weight in the FTSE/JSE SA
Listed Property Index (SAPY), this posed significant                                                  Our sense is that the market and companies
sector risk if (and when) their prices normalised.                                                    are now cognisant of how difficult conditions
This occurred in early 2018 (Figure 13 on the                                                         are and the downside risks involved.
following page), and much more aggressively than                                                      Companies are reducing growth guidance and
we anticipated – contributing substantially to the                                                    make no secret of how difficult things really
current sector malaise. By way of comparison,                                                         are. Expectations now are more reasonable.
at the time of writing property heavyweight                                                           This does not mean conditions will be easier or
Growthpoint’s total return was down 7% over 2018.                                                     that they can’t get worse, nor does it mean that
By contrast, the SAPY benchmark index, which                                                          there won’t be nasty surprises.
has a heavy weighting to the Resilient stable, was
                                                                                                      It just means that market expectations and
down 23%. Resilient stable companies’ share
                                                                                                      pricing are now more realistically taking this into
prices roughly halved in value this year.
                                                                                                      account. One of our preferred relative valuation
The Resilient stable’s share price overvaluation                                                      measures, the spread between SA REITs and the
concerns are now behind us. There could even be                                                       inflation-linked bonds, is now at a level last seen
upside if market concerns are alleviated.                                                             during the global financial crisis.

FIGURE 12: ASSET CLASS RETURNS: LISTED PROPERTY RANKS TOPS OVER THE LONG TERM

                        1-YEAR RETURNS to end of September                                                     RETURNS to end of December 2018

  Sep 10    Sep 11    Sep 12   Sep 13    Sep 14    Sep 15      Sep 16   Sep 17       Sep 18         H1 2018        YTD         3–year       5–year      10–year      15–year

 SA Real   SA Real   SA Real    SA       SA Real   SA Real       SA     SA Real                       SA           SA            SA        SA Real      SA Real      SA Real
                                                                                    SA Cash
 Estate    Estate    Estate    Equity    Estate    Estate      Bonds    Estate                       Cash         Cash         Bonds       Estate       Estate       Estate
                                                                                     7.3%
  24.6%     6.2%      32.6%    22.7%      14.9%     25.3%       7.5%     8.8%                        3.6%         5.4%          7.6%        6.8%         12.0%        16.2%

    SA       SA       SA       SA Real    SA         SA         SA        SA           SA              SA           SA           SA           SA           SA         SA
  Equity   Bonds     Equity    Estate    Equity     Cash       Cash      Cash        Bonds           Equity       Bonds         Cash         Cash        Equity      Equity
   17.2%    6.0%     19.9%      10.8%    13.9%      6.3%       7.2%      7.8%         5.9%            2.3%         4.8%         7.3%         6.8%         9.7%       14.7%

    SA       SA        SA        SA        SA        SA          SA       SA           SA              SA         SA             SA           SA           SA          SA
  Bonds     Cash     Bonds      Cash     Bonds     Bonds       Equity   Bonds        Equity          Bonds       Equity        Equity       Bonds        Bonds       Bonds
  15.0%     5.7%     15.8%      5.1%      6.0%      6.1%        6.4%     6.9%         1.1%           -3.0%       -3.8%          6.7%         6.5%         8.1%        8.2%

   SA        SA        SA        SA        SA        SA       SA Real     SA         SA Real        SA Real      SA Real      SA Real         SA           SA          SA
  Cash     Equity     Cash     Bonds      Cash     Equity     Estate    Equity       Estate         Estate       Estate       Estate        Equity        Cash        Cash
  7.2%      3.4%      5.5%      3.3%      5.5%      2.0%       2.7%      4.3%         -13.5%         -3.2%       -22.2%        -1.4%         5.4%         6.8%        7.3%
                                                                                  Source: FactSet. SA Equity represented by FTSE/JSE Shareholder Weighted All Share (SWIX) Index

                                                                                                                                   THE NEW WORLD ORDER 2019
16          LISTED PROPERTY

LISTED PROPERTY YIELDS ARE HIGH
                                                                                        FIGURE 13: ANNUS HORRIBILIS − RESILIENT STABLE DRAGS THE SECTOR
Three years ago, we cautioned clients that a                                            DOWN (THICK LINE)
forward yield of as low as 6% was very expensive.
                                                                                                               10%
Today, at a forward yield approaching 10% for
the SAPY Index and SA REITs, the valuation                                                                      0%

                                                                                              INDEXED
environment is completely different: it’s cheap.                                                               -10%

Dividends can fall by a third and you will receive                                                             -20%
the same yield as was offered three years ago!                                                                 -30%

                                                                                              TOTAL RETURNS
Property yields were last at these levels during                                                               -40%
the global financial crisis.                                                                                   -50%

02/ WHAT ARE OUR                                                                                               -60%

CONCERNS?                                                                                                      -70%

                                                                                                               -80%
It’s “the economy, stupid”, as the saying goes.                                                                         Jan        Feb            Mar           Apr      May         Jun          Jul     Aug          Sep             Oct
Conditions for property companies are very                                                                              2018                                                                                                           2018

difficult and could deteriorate further. New                                                            NEPI Rockcastle Plc                       Resilient REIT Limited                    Fortress REIT Ltd Class B
rentals are often being signed at lower levels and                                                      Greenbay Properties Ltd.                  Fortress REIT Ltd Class A                 FTSE/JSE SA Listed Property (SAPY) Index
there is a strong possibility that vacancies may
                                                                                                                                                                                                                                          Source: FactSet
increase. The longer it takes for conditions to
improve, the worse the damage. The economic
crisis affects all South African companies and
industries. In a poor environment, listed property                                     FIGURE 14: ELEVATED SA GOVERNMENT BOND YIELDS, GOOD FOR
                                                                                       PROPERTY IF THEY FALL
should be more defensive than most other
domestic local equities.                                                                          11.0%

                                                                                                10.5%
Macroeconomic conditions aside, there are still
issues that worry us within the property sector.                                               10.0%

These include:                                                                                      9.5%

                                                                                                   9.0%
DIRECT PROPERTY VALUATIONS
                                                                                                    8.5%
COULD FALL
                                                                                                   8.0%
Considering the state of the economy and the
                                                                                                     7.5%
level of bond yields, we are surprised that direct
                                                                                                    7.0%
physical property capitalisation rates (a measure
                                                                                                    6.5%          South African Benchmark Bond – 10-Year Yield
used to value physical properties) have held up so
well. We would have expected cap rates to have                                                     6.0%
                                                                                                                 2003

                                                                                                                        2004

                                                                                                                                2005

                                                                                                                                         2006

                                                                                                                                                  2007

                                                                                                                                                         2008

                                                                                                                                                                  2009

                                                                                                                                                                         2010

                                                                                                                                                                                  2011

                                                                                                                                                                                           2012

                                                                                                                                                                                                  2013

                                                                                                                                                                                                         2014

                                                                                                                                                                                                                2015

                                                                                                                                                                                                                         2016

                                                                                                                                                                                                                                  2017

                                                                                                                                                                                                                                          2018
widened by 100 to 200 basis points (bps), which

            "
                                                                                                                                                                                                                                          Source: FactSet

WE WERE OF
                                         FIGURE 15: VALUE? SA LISTED PROPERTY INDEX FORWARD YIELD
THE VIEW THAT
THE SA MARKET
AND PROPERTY
                                           DIVIDEND YIELD (NEXT TWELVE MONTHS)

                                                                                 14%

COMPANIES                                                                        13%

WERE TOO                                                                         12%

                                                                                 11%
BACKWARD
                                                                                 10%
LOOKING,UNDER-
                                                                                 9%
ESTIMATING                                                                       8%
THE GRAVITY                                                                      7%
OF FUTURE                                                                        6%    FTSE/JSE SA Listed Property (SAPY) Index dividend yield (NTM)
ECONOMIC                                                                         5%
AND PROPERTY
                                                                                       2004

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                                                                                                                                                                                                                  2016

                                                                                                                                                                                                                                2017

                                                                                                                                                                                                                                         2018

DETERIORATION.

            "
                                                                                                                                                                                                                                          Source: FactSet

OLD MUTUAL INVESTMENT GROUP
LISTED PROPERTY                    17

implies buildings’ values fall by over 10%. If this    ■■ Non-sustainable earnings growth drivers:
occurred, company net asset values (NAVs)                 There are deals that provide a one-off
would fall by more than this because balance              boost to growth. This often dovetails with a       OFFSHORE
sheets are geared. This will make loan-to-value           flood of SA property companies investing           INVESTMENTS:
ratios more stretched.
                                                          offshore (see box alongside). The problem          EXAMPLES OF
There are mitigating factors. Unlike direct               is not that the sustainable earnings base          N O N - S U S TA I N A B L E
physical property, listed property prices have            of the company is overstated, but that             GROWTH DRIVERS
weakened and are trading below NAV, so the                investors get distorted expectations of
listed market is priced for property values to fall.      potential earnings growth. Eventually              Most domestic property
The South African listed market, erroneously in                                                              companies have been
                                                          capacity to do these deals is exhausted.
our view, pays scant attention to NAVs, which                                                                aggressively investing
                                                          Investors may get a negative surprise when         offshore to diversify away
means that a fall in direct valuation would have
                                                          companies are left “naked”, having to rely         from a tough local economy,
a muted effect on prices. Most property funds’                                                               look for other sources of
                                                          on scanty organic growth to drive earnings
gearing levels are not elevated, so if prices fall,                                                          growth and benefit from
sector gearing would move from a comfortable              upwards.                                           property yields well in excess
                                                                                                             of funding costs (unlike in
level to the limits of the comfort zone. There are     ■■ Negative surprises: In a difficult                 SA). Consequently, listed
always those companies who would be under                                                                    property performance and
                                                          environment, every results season will see
great pressure.                                                                                              price today are less of a
                                                          some companies suffering unexpected
                                                                                                             function of South African-
EXCESS PHYSICAL PROPERTY SUPPLY                           negative surprises – for instance, a major         specific factors. A prolonged
IN A LOW DEMAND ENVIRONMENT                               tenant unexpectedly leaves or fails. While,        strong rand could actually
                                                          in aggregate, this may only make a small           be bad for the distribution
There is a structural over-supply of office and                                                              growth rate of domestic
retail property. This is not new news. Developers         difference, it can result in materially poor
                                                                                                             REITs with high offshore
and corporates are still building additional              performance for the REIT concerned and             exposure.
offices and shopping centres despite the                  sour general sentiment.
                                                                                                             A consequence of the move
absence of incremental new demand from                 The concerns we delineated that have                  offshore, deliberate or not,
job creation or retail sales. If the economy was       receded are predominantly structural or               is often a one-off boost to
stronger this would be naturally absorbed, but         valuational in nature. The concerns that              earnings growth. Here are two
in this environment it pushes down rentals and                                                               scenarios to illustrate this:
                                                       remain are functions of our low growth
occupancies. The level of new development              environment, which could get worse before             - A South African property
is slowing, but there is still an overhang from        it gets better for property companies. If the           company buys assets
projects in progress.                                                                                          overseas that yield 7% and
                                                       economy improves, these concerns dissipate.
                                                                                                               it funds these entirely with
Shopping centres face additional challenges.           Another important new concern is the                    debt at an offshore currency
Edcon is under grave pressure and most other                                                                   rate of 3%. Immediately,
                                                       excessive gearing levels and currency and               earnings will rise by 4%
nationals and line stores are facing flat or           interest rate structures of many offshore               (7% - 3%) times the value
declining sales per metre of shop floor. Rent-to-      acquisitions. This has front-loaded growth              of the acquisition. This can
sales ratios having deteriorated markedly. There       and increased the risk of a nasty outcome               be very material to that
is only so much low trading density growth the                                                                 year’s earnings growth. The
                                                       if these investments or structures sour,
                                                                                                               company will need to do
sector can absorb before there is a downward           while also being distribution-detrimental to            another deal of a bigger size
step change in the sector. It is still early days      unwind. (These issues need a separate article           next year to replicate that
in the generalised retail deterioration, but a         to explain.)                                            growth rate effect.
prolonged slowdown will be painful and novel
                                                       There are no easy catalysts for a recovery in         - A local company may have
for the sector.                                                                                                funded a past offshore
                                                       listed property, but the high return on offer           acquisition with SA rand
LOW QUALITY EARNINGS, NON-                             provides a cushion. If general conditions               debt at say 10%. If it swaps
SUSTAINABLE DRIVERS OF EARNINGS                        continue to deteriorate, domestic property is a         this into foreign currency
GROWTH AND NEGATIVE SURPRISES                          value trap (cheap, but at risk of getting worse),       denominated debt at
                                                                                                               say 3%, the company can
                                                       but the property sector would not be alone.
■■ Low quality/inflated earnings base:                                                                         reduce its interest costs
   With their backs against the wall, some             The economy and property are cyclical. The              by 7% (10% - 3%) times
                                                                                                               the value of the debt. A
   management teams look for any source                most money is made buying at cycle bottoms
                                                                                                               major one-off reduction in
   of income, no matter how fleeting. If these         and selling at cycle tops. If investors were            interest expenses leading
   sources are depleted, earnings may need             happy to hold property at a 6% forward yield,           to an earnings boost, but
                                                       it is not obvious they should be in a hurry to sell     less rand-hedge protection
   to be rebased downwards, which is what                                                                      as assets and liabilities are
                                                       at a 50% higher income return of over a 9%
   some companies have already done. This                                                                      now in the same currency.
                                                       yield. Bear markets can clear out some of the
   is less of an issue than some believe as this
                                                       excesses created in the cycle highs. We have
   type of income is not substantial. The risk
                                                       shown how some of this has occurred in the
   here lies with the companies that have not          property sector, creating a healthier backdrop
   disclosed the extent of low-quality income          for the recovery whenever that occurs.
   they distribute.

                                                                                                              THE NEW WORLD ORDER 2019
18       YIELD CURVE ADJUSTMENT

      WHAT COULD
      DRIVE A BOUT
      OF BULLISH
      YIELD CURVE
      FLATTENING
      IN THE NEW
      YEAR?

WRITTEN BY
WIKUS FURSTENBERG,
PORTFOLIO MANAGER
AND HEAD OF INTEREST
R AT E P R O C E S S

                                  Credit: Clem Onojeghuo
OLD MUTUAL INVESTMENT GROUP
YIELD CURVE ADJUSTMENT                                    19

Following a rather protracted period during which political and
market events introduced some distortion to the interest rate
cycle, a level of “normality” returned by the end of 2017. What do
we mean by “normality”, you may ask? Simply put, the focus has
returned to growth and inflation drivers, as opposed to political
events, influencing monetary policy and the interest rate cycle.

C
              onsidering all the     FIGURE 16: THE INTEREST RATE CYCLE...
              various drivers of     WHAT IS THE NEXT BIG YIELD CURVE ADJUSTMENT?
              the interest rate
              cycle, our view of                                                                                          IS THIS THE NEXT
                                                                                                                          BIG YIELD CURVE
              where we are at
                                                                                                                          ADJUSTMENT?
the time of writing (December
                                                                                  INFLATION PEAKS
2018) is indicated below                                                        Economic activity slows
(see Figure 16). However, of
greater importance is where
                                             Bear flattening                                                                   Bull flattening
we are heading and, more
specifically, how the yield
curve will behave.

01/ WHAT IS
THE NEXT BIG                             FIRST RATE HIKE                                                                      FIRST RATE CUT
YIELD CURVE                                Rate of inflation
                                            increase slows
                                                                                                                              Rate of inflation
                                                                                                                              decrease slows
ADJUSTMENT?
While it goes without saying
that financial markets never
move in an orderly fashion, it is            Bear steepening                                                                    Bull steepening
clear that the dominant yield
curve change over the past
year or two was for the yields
of longer-dated nominal
bonds to rise to higher levels,
                                                                                 INFLATION TROUGHS
while the yields at the short                                                      Economic activity
                                             WE ARE HERE                              accelerates
end still tracked the repo
rate lower until as recently as
March 2018.

This is also known as bearish
yield curve steepening. With           Bear Steepening: longer-dated bond yields rise        Bull Flattening: longer-dated bond yields fall faster
inflation rearing its head and         faster than yields at the short end (often happens    than yields at the short end (lower inflation and the end
the South African Reserve              when inflation is expected to rise).                  of the monetary policy tightening cycle expected).
Bank (SARB) concerned                  Bear Flattening: short-term bond yields               Bull Steepening: short-term bond yields fall at a
about the potentially negative         rise faster than long bond yields (often precedes     faster rate than long bond yields (often precedes
implication of volatility drivers      interest rate increases).                             interest rate decreases).
(namely, the weaker rand and
higher crude oil prices), the
                                                                                                                            Sources: Bloomberg, Futuregrowth
Bank deems it prudent to
“talk tough” and even consider
raising the repo rate in the
                                    of the view that, if anything,
                                                                          02/ DRIVERS OF                           flattening yield curve, our focus

near term.
                                    the market has been
                                    too aggressive in pricing
                                                                          THE NEXT BIG                             has already shifted to the next
                                                                                                                   potential major yield curve
This scenario, called a bearish     monetary policy tightening
                                                                          YIELD CURVE                              change – a bullish yield curve
yield curve flattening, is          (see Figure 17 on the following       ADJUSTMENT                               flattening (refer back to the
already priced in by financial      page).                                Given that the market has                interest rate cycle graphic). In
markets. However, we are                                                  priced in the move to a bear             this case, the yields of longer-

                                                                                                                     THE NEW WORLD ORDER 2019
20              YIELD CURVE ADJUSTMENT

  FIGURE 17: RATE HIKES ALREADY PRICED IN... SA FORWARD RATE MARKET
  (PROBABILITY OF A 50 BASIS POINT OVER TIME)

      200%
                                                                                                                                                                                          180%
       180%                                                                                                                                                            166%                                                   will remain relatively benign
       160%                                                                                                                                           148%                                                                    over the next 12 months.
       140%                                                                                                                           132%
       120%                                                                                                         104%
                                                                                                                                                                                                                              This, in combination with a
                                                                                                      101%
      100%                                                                          84%                                                                                                                                       fairly hawkish central bank,
       80%                                                        78%
       60%                               56%     60%                                                                                                                                                                          is supportive of an eventual
       40%             30%         35%                                                                                                                                                                                        decrease of longer-dated
       20%     8%                                                                                                                                                                                                             nominal bond yields.
        0%
       -20%
       -40%                                                                                                                                                                                                                   FOREIGN INVESTORS
       -60%                                                                                                                                                                                                                   HAVE REDUCED THEIR
       -80%
      -100%
                                                                                                                                                                                                                              HOLDINGS OF RSA
      -120%                                                                                                                                                                                                                   LOCAL CURRENCY
      -140%                                                                                                                                                                                                                   GOVERNMENT BONDS
                  1        2         3    4             5                  6             7               8                 9                12                15                18            21
                                                                                                                                                                                                                              The significant net selling of
                                           01 October 2018                           31 July 2018                          18 July 2018
                                                                                                                                                                                                                              SA bonds by foreign investors
Sources: Bloomberg, Futuregrowth                                                                                                                                                                                              could be attributed to various
                                                                                                                                                                                                                              factors. These include risk
dated nominal bonds decrease                   disinflationary forces. With US                                                      higher prices of local goods                                                              aversion in response to
in anticipation of lower inflation             yields more contained, and in                                                        and services, weak local growth                                                           significant emerging market
and the end of the monetary                    light of the fact that this remains                                                  might offset most of the                                                                  turmoil, the gradual draining
policy tightening cycle. As this               the global benchmark, upward                                                         negative relative price changes.                                                          of excess global liquidity
unfolds, longer-dated bonds                    pressure on local yields from this                                                                                                                                             and SA idiosyncratic factors.
will render a higher return than               source would be significantly                                                        LIMITED RAND                                                                              Noteworthy is the fact that this
short- and medium-dated                        reduced.                                                                             DEPRECIATION                                                                              selling had been concentrated
                                                                                                                                    PASS-THROUGH                                                                              in nominal bonds with a
bonds (remembering that bond
                                               THE RAND HAS                                                                         SUGGESTS A STRONG                                                                         term to maturity of eight
yields fall when prices rise). The
                                               DEPRECIATED SHARPLY                                                                  DISINFLATIONARY                                                                           years and longer. With this
potential drivers of such an                                                                                                        BACKDROP
                                               AND APPEARS TO BE                                                                                                                                                              large and important section
outcome are considered below.
                                               OVERSOLD                                                                             As clearly illustrated in                                                                 of the broader investor base
US TREASURY                                    The rand has weakened                                                                Figure 19, the inflation rate                                                             significantly reducing their
MARKET YIELDS HAVE                             significantly since the end of                                                       and exchange rate have                                                                    holdings of longer-dated
APPROACHED OUR FAIR                            the first quarter of 2018. While                                                     decoupled. Of course, the                                                                 bonds (refer to Figure 20),
VALUE ESTIMATE                                 nobody can predict currency                                                          combination of subdued                                                                    future potential selling
Sustained strong economic                      movements with any degree                                                            global inflation, weak local                                                              pressure is lessened and, if
growth and a significantly                     of certainty, we can safely state                                                    economic growth and strong                                                                market conditions indeed
reduced unemployment rate,                     that the rand seems oversold                                                         competition in the retail sector                                                          turn more favourable, these
combined with moderate                         relative to our estimate of its                                                      has an important role to play.                                                            investors may be lured back.
inflationary pressure, afforded                purchasing power parity                                                              Unless economic growth picks                                                              It must be stressed that this is
the US Federal Reserve (Fed)                   (Figure 18). While some of the                                                       up significantly, and in a very                                                           a technical market driver. As a
an opportunity to finally start                recent weakness admittedly                                                           short space of time, we believe                                                           prerequisite, the fundamental
the process of interest rate                   might still find its way into                                                        that the inflation outlook                                                                drivers need to fall in place.
normalisation and raise its
policy rate for the first time in
                                                FIGURE 18: THE RAND COULD STRENGTHEN… USD/ZAR EXCHANGE RATE ESTIMATE BASED
the almost 10 years since the                   ON PURCHASE POWER PARITY
start of the global financial
crisis. In the process, the US                               16
Treasury market has drifted to                               14
more realistic levels, with the
                                                  AR

                                                             12
benchmark 10-year Treasury
                                                  SD

yield now close to our estimate                              10

of fair value of 3.2% - 3.5%.                                8
                                                  RA D PER

Although it could very well
                                                             6
drift to a higher level, we feel
                                                             4
comfortable that the market
now did most of the work by                                  2

appropriately pricing in this                                0
shift, especially since we are
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not convinced that this cycle
is going to be as strong as in
                                                                                                                                  Confi ence nterval                                       SD/ AR                     PPP         o el
the past, mostly due to strong
                                                                                                                                                                                                                                                    Sources: Bloomberg, Futuregrowth

OLD MUTUAL INVESTMENT GROUP
YIELD CURVE ADJUSTMENT                                                            21

                                                                                                                                                                                                                                                                                                 THE RISK TO FISCAL
FIGURE 19: BENIGN INFLATION… PASS-THROUGH FROM RAND DEPRECIATION HAS BEEN LIMITED                                                                                                                                                                                                                CONSOLIDATION
                                                                                                                                                                                                                                                                                                 REMAINS, BUT THE
                        R18                                                                                                                                                                                                                                           16,0                       CLOUD IS NOT AS DARK
                        R16
                                                                                                                                                                                                                                                                                                 AS IT WAS LAST YEAR
                                                                                                                                                                                                                                                                      14,0
                        R14
                                                                                                                                                                                                                                                                                                 Of all the drivers mentioned,
                                                                                                                                                                                                                                                                      12,0
                                                                                                                                                                                                                                                                                                 this is the most significant
                        R12

                                                                                                                                                                                                                                                                               INFLATION YoY %
                                                                                                                                                                                                                                Dollar-rand FX pass- 10,0
                                                                                                                                                                                                                                                                                                 hurdle for bullish yield curve
SD/ AR

                        R10                                                                                                                                                                                                   through has decoupled                                              flattening. Our thoughts on
                                                                                                                                                                                                                                 from inflation rate 8,0
                        R8                                                                                                                                                                                                                                                                       the link between sustained
                                                                                                                                                                                                                                                                      6,0                        low economic growth and
                        R6
                                                                                                                                                                                                                                                                      4,0                        the negative impact on the
                        R4
                                                                                                                                                                                                                                                                                                 fiscal situation, mainly via the
                        R2                                                                                                                                                                                                                                            2,0
                                                                                                                                                                                                                                                                                                 tax revenue channel, and the
                        R0                                                                                                                                                                                                                                            0,0                        resultant threat to the country’s
                                                                                                                                                                                                                                                                                                 sovereign risk profile, are well
                              Jan 01

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                                                                                                                                                                                                                                                                                                 telegraphed. The question
                                                                                                                                                                                                                                                                                                 is: what may contribute to
                                                                                S ollar/ran e c an e rate                                         S                   SA ea line in ation rate R S
                                                                                                                                                                                                                                                                                                 a change to our thinking?
                                                                                                                                                                                                                                                                                                 Clearly, a recovery in the
                                                                                                                                                                                           Sources: OMIG Economic Research Unit, Futuregrowth
                                                                                                                                                                                                                                                                                                 growth outlook, tax efficiency
                                                                                                                                                                                                                                                                                                 gains at the South African
FIGURE 20: THE DAMAGE IS ALREADY DONE… FOREIGN OWNERSHIP OF RSA GOVERNMENT                                                                                                                                                                                                                       Revenue Service and some
BONDS (NOMINAL AND INFLATION-LINKED BONDS)                                                                                                                                                                                                                                                       improvement in expenditure
                                                                                                                                                                                                                                                                                                 management at all levels of
                        45%
                                                                                                                                                                                                                                                                                                 government will improve the
                        43%
                                                                                                                                                                                                                                                                                                 outlook for much-needed fiscal
                        41%                                                                                                                                                                                                                                                                      consolidation. In our minds,
NON-RESIDENT HOLDINGS

                        39%                                                                                                                                                                                                                                                                      this is a significant red light that
                        37%                                                                                                                                                                                                                                                                      might continue to overshadow
                        35%
                                                                                                                                                                                                                                                                                                 the more favourable factors
                                                                                                                                                                                                                                                                                                 listed above. Even so, a rate of
                        33%
                                                                                                                                                                                                                                                                                                 change in the right direction
                        31%
                                                                                                                                                                                                                                                                                                 may very well suffice for a
                        29%                                                                                                                                                                                                                                                                      more muted curve flattening,
                        27%                                                                                                                                                                                                                                                                      considering how much
                        25%                                                                                                                                                                                                                                                                      negative news has been priced
                                                                                                                                                                                                                                                                                                 in at this point in the cycle.
                                       May 11

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                                                                                                                                                                          May 15

                                                                                                                                                                                        Nov 15

                                                                                                                                                                                                          May 16

                                                                                                                                                                                                                        Nov 16

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                                                                                                                                                                                                                                                                                                 03/ OUR
                                                                                                                                                                                                                     Sources: National Treasury, Futuregrowth
                                                                                                                                                                                                                                                                                                 INVESTMENT
                                                                                                                                                                                                                                                                                                 STRATEGY
                                                                                                                                                                                                                                                                                                 Considering the factors
FIGURE 21: GOVERNMENT’S BOND DEBT LOAD HAS A STRONG BEARING ON THE YIELD
                                                                                                                                                                                                                                                                                                 discussed above, we are
CURVE SLOPE
                                                                                                                                                                                                                                                                                                 cautiously optimistic about the
                        60%                                                                                                                                                                                                                                           150                        rising probability of a scenario
                                                                                                                                                                                                                                                                               S

                                                                                                                                                                                                                                                                                                 where long-dated bond yields
                        55%
                                                                                                                                                                                                                                                                      100                        decrease at a faster rate than
                                                                                                                                                                                                                                                                               AS S P

                        50%                                                                                                                                                                                                                                                                      short- and medium-dated
                                                                                                                                                                                                                                                                      50                         bond yields in the medium
/GDP

                        45%
                                                                                                                                                                                                                                                                                                 term. This may also be seen as
                                                                                                                                                                                                                                                                               EAR SPREAD

                        40%                                                                                                                                                                                                                                           0                          a reflection of at least some
GR SS DE

                                                                                                                                                                                                                                                                                                 recovery, with the possibility
                        35%
                                                                                                                                                                                                                                                                      -50                        of lower inflation towards the
                        30%                                                                                                                                                                                                                                                                      back end of 2019 and a slightly
                                                                                                                                                                                                                                                                               EAR/

                                                                                                                                                                                                                                                                      -100                       better economic growth
                        25%
                                                                                                                                                                                                                                                                                                 outlook. For this reason, we
                        20%                                                                                                                                                                                                                                           -150                       have used bouts of market
                                                                                                                                                                                                                                                                                                 weakness over the past few
                                Dec 88

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                                                                                                                                                                                                                                                                                                 months to reduce our initial
                                                                                                                                                                                                                                                                                                 significant underweight
                                                PS Debt Profiles                                 Gross ebt/GDP                                  mont la                    e                SAG                       SAG            Sprea               R S
                                                                                                                                                                                                                                                                                                 position in long-dated bonds.
                                                                                                                                                                                            Sources: National Treasury, Bloomberg, Futuregrowth

                                                                                                                                                                                                                                                                                                  THE NEW WORLD ORDER 2019
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