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MONTHLY MUSINGS FROM COUNTERPOINT ASSET MANAGEMENT – August 2013
Introduction:
August proved a difficult month for most global assets as market participants shied from risk as they
built conviction of imminent tapering from the Fed. During the month the bellwether US 10y
treasury continued to rise, and troubles in emerging markets, especially those with large current
account deficits, surfaced strongly. In a speech at Jackson Hole on the 23rd August, IMF managing
director Christine Lagarde mentioned that since the introduction of unconventional monetary
policies in 2008, cumulative net flows to emerging markets rose by $1.1 trillion “squarely above its
long-run structural trend by an estimated $470 billion”. The fear is that these flows could reverse
given the tapering of unconventional monetary policies. Towards the end of the month, global risk
rose even further as geopolitical tensions surrounding the chemical attacks in Syria frayed to the
extent of possible military action being taken by some Western powers against that government.
The news boosted both the oil and the gold price (see Chart 1), which together with better news out
of China and the rise in the CRB index made the commodities sector the standout performer over
the month. This made for good news the JSE All Share index, which rose 2.58% over the month,
buoyed mostly by the basic materials (+7.62%) and the oil and gas sectors (+6.01%). Most other SA
asset classes fared badly, with the JSE All Bond index (-1.30%), inflation-linked bonds (-3.46%), JSE
listed property (-3.5%) and the JSE preference shares index (-0.92%) all down for the month.
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Chart 1: The gold and oil price: Geopolitical risk factored in towards the end of August 2013
Gold
Oil
Pleasing news for Counterpoint AM was that cash inflows continued to arrive at the steady quasilinear pace they have since inception. AUM rose from R832m at the end of July 2013 to R899m at
the end of August, an increase of R67m over the month. We are grateful for the continued support
of our supporters and clients in this regard. We remain confident that through persistent assiduity,
vigilance and application of our minds and expertise to our task we are planting the seeds for a
successful company.
The performance numbers of our funds continued to please in August. Once again we can report a
good month of relative performance, with the income and cautious funds in the top quartile of their
respective categories, and the balanced-plus and value funds in the top third of their respective
categories. The Met Moderate fund posted a return in the second quartile. The Met high yield fund
has a totally different strategy, focusing on longer term dividend growth and is not benchmark
cognizant. The positions we held continued to pay off over August as well. We shall however need
to be nimble to navigate the tricky markets ahead, which remain challenging and inscrutable as
always.
Financial markets
Syrian geopolitical risk added fuel to the fire posed by the expected imminent tapering of asset
purchases from the US Federal Reserve, especially for emerging markets. The Fed has been the
largest marginal buyer of US treasuries by far this year, accounting for roughly 75% of net purchases
of US treasuries this year. The market has anticipated the Fed’s tapering by continuing to sell off
treasuries over the month, but has now extended its selling to emerging market bonds. Countries
with weak current account deficits in particular have had a torrid time, with especially Indian,
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Indonesian, Turkish and Brazilian bonds and currencies being sold off heavily. Emerging equity
markets have fared no better, with once again the countries with the largest current account deficits
having fallen most since Mr. Bernanke first alluded to the possible tapering from the Fed on 22nd
May 2013 (see Chart 2). The exception seems to have been South Africa, which has had a resilient
stock market relative to its current account deficit. As the chart indicates, South Africa, despite
having a substantial current account deficit (-6% of GDP), has had a comparatively resilient stock
market that has only declined by -5% in USD since May 22nd.
Chart 2. Emerging market stock market performance in USD and Current Account balances: SA has
come off relatively lightly.
6%
Current Account Balance (%)
Malaysia
Philippines
China
4%
2%
0%
-40%
-35%
-30%
Indonesia
-25%
-20%
-15%
-10%
Mexico
-5%
Thailand
Brazil
0%
-2%
-4%
India
Turkey
South Africa
Equity market Performance in US $ since 22 May 2013 (Bernanke tapering
speech)
-6%
-8%
Large persistent current account deficits are usually indicative of economies living beyond their
means. Economic growth is under these circumstances usually sustained by surplus savings from
abroad, which thanks to the financial repression in developed market economies has been easily
financed up to now. But the risk-adjusted yield differential is now turning against emerging markets.
One must now ask whether the temporary tide of capital inflows is coming to an end with the
withdrawal of easy money from the global financial system. Net flows are at the margin driven by
foreign investors in emerging countries. (South Africa’s net foreign flows into its bond and equity
markets amounted to -R1,25bn from 22nd May 2013 to the 31st August 2013, compared with a total
inflow of R116bn for the whole of 2012 and 2013 until the 22nd May. Clearly, net flows have been
drying up.) High variability and low predictability of capital flows will likely continue in a climate of
increasing financial globalization (source: IMF Working Paper, WP/13/183, August 2013). It is clear
that policymakers will need to live with this volatility and use prudential measures to help maintain
stability. The problem is that policymakers are often lulled into believing that their imbalances are
sustainable.
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Chart 3: Volatility returns to Emerging Market currencies in August 2013 as investors start bailing
out.
110
EM Currency Value vs USD based to 100
105
100
95
90
Indonesian Rupiah
Turkish Lira
85
SA Rand
80
Indian Rupee
26-Aug-13
12-Aug-13
29-Jul-13
15-Jul-13
1-Jul-13
17-Jun-13
3-Jun-13
20-May-13
6-May-13
22-Apr-13
8-Apr-13
25-Mar-13
11-Mar-13
25-Feb-13
11-Feb-13
14-Jan-13
31-Dec-12
28-Jan-13
Brazilian Real
75
The strong response to a falling currency is usually to increase interest rates, but this is often an
unpopular option. Brazil has chosen this path this year, as has Indonesia of late. Weaker responses
entails defending the currency by depleting reserves, and an even weaker one is the tightening of
exchange controls that destroy investor confidence (e.g. India). Emerging market policymakers have
been making noises as to ways of curbing the impending capital exodus, but in there is little they can
do in the face of concerted investor pessimism. South Africa does not stack well in its emerging
market peer group, having a large negative current account which remains under pressure (the trade
balance disappointed in August, printing a R-14.2bn deficit versus the consensus expectation of R9.0bn). The trade deficit was driven strongly by imports. It is hoped that the weakening domestic
economy will compress the deficit in the months ahead; failing this the rand will continue under
pressure despite its undervalued exchange rate.
Good news is that China seems to be on a stabilizing growth path in the short term, with the PMI for
August surprising expectations at 51.0, it being the highest reading of this indicator since April 2012.
The underlying trend in Chinese inventory restocking is underway, which has boded well for the
prices of commodities. This, together with prospects for better US growth, has turned around the
performance of commodity stocks on the JSE of late. However, better Chinese data is being
counterbalanced by weaker data in the emerging world, with Indian Q2 GDP for example growing at
4.4% y/y, the third quarter in a row that it registers sub-5% growth. Europe, although clearly in a
slower deteriorating trend, is not back on a clear growth path yet, and has still a long struggle ahead
to start making an indent in employment, especially the peripheral countries of that economic zone.
Greece, Cyprus, Portugal and possibly Spain will almost certainly require more capital of debt write4
downs in the near future. But this issue should remain in the background until after the German
elections on the 22nd September.
The huge question remains this: To what extent will the global economy, pitted with fragile streaks
and by no means robust, be able to cope with rising US bond yields, and the continual flight of
capital out of risky assets.
Investment strategy
Risks appear finely balanced between the opposing outcomes of tentative economic growth
establishing itself, and the withdrawal of excessively high levels of global liquidity which might derail
the recovery. The outcome remains hugely data dependant. We still remain cautiously overweight
SA equities under the circumstances, judging their relative risk-return trade-off is still good relative
to other asset classes. However, our overweight SA equities arguments no longer have the
compelling dominance they had only a few months ago. The re-pricing of the SA bond market, the
rise of real yields and the sell-off in the property sector has tilted relative attractiveness away from
SA equities. Neither is the JSE trading at cheap levels relative to overseas developed equity markets
on absolute valuation levels. A firmer conviction is for pressure to continue on the rand despite its
current weakness; to this extent we remain fully invested offshore.
Chart 3: JSE ALL Share index – at high historic PE ratios.
The situation calls for an acute and nimble monitoring of the financial landscape as it unfolds. This is
not a time for unwaveringly steadfast views. Flexibility of action – and thought - should win the day.
Below, on separate pages, is a brief commentary on our six funds. The notes to the three balanced
funds are the same – the only difference being the exposure to equities. Note that these are also the
commentary used in our monthly fact sheets.
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Fund specifics:
MET Enhanced Income Fund
Size of fund at 31st August 2013: R257.3m
Monthly performance: 0.28%
August was a month difficult to eke out a positive return in the income fund space, and most of the
investible asset classes apart from cash delivered a negative return. Property and inflation-linked
indices lost over 3% over this period, whereas the JSE All Bond index (-1,3 %) and the JSE preference
share index (-0.9%), although performing marginally better, also registered returns in negative
territory. Rand depreciation (from 9.80 to 10.40 in 18 days during August) had repercussions for the
local yield curve, which re-priced higher. Given that property valuations are to a certain extent
dependent on the level of long term interest rates, listed property valuations were forced lower as
bond yields sold off.
Although we have been reluctant buyers (in small size) of fixed rate paper, we have tried to steer
clear of long duration in fixed-rate paper, given that we are not constructive on SA long bonds while
the benchmark US 10 year treasury remains under pressure from Fed tapering.
Given the steepness of the local yield curve, there are juicy running yield gains to be had from
investing a short way up the yield curve at present. In view of this, we have therefore been taking
limited exposure to short-dates fixed rate bonds, although this by no means indicates that we deem
the structure of interest rates in South Africa to have fully re-priced to reflect the challenging
investment environment.
From a risk-return perspective we think it too early to increase exposure to either the property or
inflation-linked asset class. Our major holding continues to be floating rate notes as we have not yet
harboured strong convictions that other alternatives provide a better risk-return trade-off yet.
Capital preservation continues to be the key driver in our investment decisions in this fund. As
opportunities present themselves, we fully intend increasing our exposure to better risk-adjusted
securities.
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MET Cautious Fund
Size of fund at 31st August 2013: R202.6m
Monthly performance: 1.18%
The dominant theme affecting global financial markets in August was the reversing of capital flows
from countries with poor fundamentals back to the developed world. This is due to the
normalization of the US’s yield curve which has shaken many markets, particularly the weaker
Emerging Countries around the world. The SA stock market, in Rand terms, has up until now, largely
escaped this trend by producing a positive return of 2.58% over the month. However, the other
domestic asset classes; bonds (-1.3%), inflation-linked bonds (-3.5%), property (-3.5%) and
preference shares (-0.9%) all produced negative returns for August. Within equities the resources
sector and oil led the way producing +7.6% and +6.0% respectively for the month.
The only significant change from an asset allocation point of view was the sale of our iShares S&P500
ETF (US exposure) as in our opinion there has been a loss of clear value there. This year has been all
about the multiple expansion and given the rise in longer dated treasuries the tail wind from this
area has dissipated. We expect earnings to end the year at $108 placing the month end value of the
Index at a forward P/E of 15.3x which is, at best, only fair.
The international exposure of the portfolio ended the month at 25.1%. This is invested in a spread of
iShares ETF’s. The major international components are invested in Global Equities and the exposure
to global property via the MET Global Property Fund. Note that the cash balance is uncomfortably
high. We see this as a temporary measure as we are still thinking about the best possible way to
deploy the funds. Note that we are finding it, in general, difficult to invest in an environment that
seems dependent on manipulation by the major central banks to get risky asset prices higher
regardless of business fundamentals.
Our local stock picks had a positive month with our holdings in Anglos (+10.3%), Sasol (+6.0%),
Billiton (+5.1) and Naspers (+2.7%) producing the largest value add. Our low weighting to the two
platinum stocks (Amplats +16.9%) and (Implats +17.0%) detracted the most value while our holdings
in Richemont (+0.8%) and British American Tobacco (-2.6%) also detracted somewhat over the
month.
At an asset allocation level, given, the macro uncertainty created by the potential of the USA yield
curve to normalize, we are comfortable right now with the exposure to risky assets. However should
opportunities (great value) emerge we will utilise the cash to add the relevant exposure to the
portfolio.
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MET Value Fund
Size of fund at 31st August 2013: R134.5m
Monthly performance: 2.91%
August was a positive month for the fund as it beat both its internal benchmark (SWIX All Share) and
the average of its peer group.
The dominant theme affecting global financial markets in August was the reversing of capital flows
from countries with poor fundamentals back to the developed world. This is due to the
normalization of the US’s yield curve which has shaken many markets, particularly the weaker
Emerging Countries around the world. The SA stock market, in Rand terms, has up until now, largely
escaped this trend by producing a positive return of 2.58% over the month. Within equities the
resources sector and oil led the way producing +7.6% and +6.0% respectively for the month.
Our local stock picks had a positive month with our holdings in Anglos (+10.3%), Sasol (+6.0%),
Billiton (+5.1) and Naspers (+2.7%) producing the largest value add. Our low weighting to the two
platinum stocks (Amplats +16.9% and Implats +17.0%) detracted the most value while our holdings
in Richemont (+0.8%) and British American Tobacco (-2.6%) also detracted somewhat over the
month.
A few mid cap shares were added during the month believing their valuations to be attractive. The
notable shares added were Oceana and Cape Vin Holdings.
Our strategy in the immediate future is to continue the pragmatic theme of caution in portfolio
construction and be mindful of where the risks truly lie.
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MET Moderate Balanced Fund
Size of fund at 31st August 2013: R49.2m
Monthly performance: 1.34%
The dominant theme affecting global financial markets in August was the reversing of capital flows
from countries with poor fundamentals back to the developed world. This is due to the
normalization of the US’s yield curve which has shaken many markets, particularly the weaker
Emerging Countries around the world. The SA stock market, in Rand terms, has up until now, largely
escaped this trend by producing a positive return of 2.58% over the month. However, the other
domestic asset classes; bonds (-1.3%), inflation-linked bonds (-3.5%), property (-3.5%) and
preference shares (-0.9%) all produced negative returns for August. Within equities the resources
sector and oil led the way producing +7.6% and +6.0% respectively for the month.
The only significant change from an asset allocation point of view was the sale of our iShares S&P500
ETF (US exposure) as in our opinion there has been a loss of clear value there. This year has been all
about the multiple expansion and given the rise in longer dated treasuries the tail wind from this
area has dissipated. We expect earnings to end the year at $108 placing the month end value of the
Index at a forward P/E of 15.3x which is at best only fair.
The international exposure of the portfolio ended the month at 24.6%. This is invested in a spread of
iShares ETF’s. The major international components are invested in Global Equities and the exposure
to global property via the MET Global Property Fund. Note that the cash balance is uncomfortably
high. We see this as a temporary measure as we are still thinking about the best possible way to
deploy the funds. Note that we are finding it, in general, difficult to invest in an environment that
seems dependent on manipulation by the major central banks to get risky asset prices higher
regardless of business fundamentals.
Our local stock picks had a positive month with our holdings in Anglos (+10.3%), Sasol (+6.0%),
Billiton (+5.1) and Naspers (+2.7%) producing the largest value add. Our low weighting to the two
platinum stocks (Amplats +16.9%) and (Implats +17.0%) detracted the most value while our holdings
in Richemont (+0.8%) and British American Tobacco (-2.6%) also detracted somewhat over the
month.
At an asset allocation level, given, the macro uncertainty created by the potential of the USA yield
curve to normalize, we are comfortable right now with the exposure to risky assets. However should
opportunities (great value) emerge we will utilise the cash to add the relevant exposure to the
portfolio.
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MET Balanced Plus Fund
Size of fund at 31st August 2013: R240.7m
Monthly performance: 1.90%
The dominant theme affecting global financial markets in August was the reversing of capital flows
from countries with poor fundamentals back to the developed world. This is due to the
normalization of the US’s yield curve which has shaken many markets, particularly the weaker
Emerging Countries around the world. The SA stock market, in Rand terms, has up until now, largely
escaped this trend by producing a positive return of 2.58% over the month. However, the other
domestic asset classes; bonds (-1.3%), inflation-linked bonds (-3.5%), property (-3.5%) and
preference shares (-0.9%) all produced negative returns for August. Within equities the resources
sector and oil led the way producing +7.6% and +6.0% respectively for the month.
The only significant change from an asset allocation point of view was the sale of our iShares S&P500
ETF (US exposure) as in our opinion there has been a loss of clear value there. This year has been all
about the multiple expansion and given the rise in longer dated treasuries the tail wind from this
area has dissipated. We expect earnings to end the year at $108 placing the month end value of the
Index at a forward P/E of 15.3x which is at best only fair.
The international exposure of the portfolio ended the month at 23.0%. This is invested in a spread of
iShares ETF’s. The major international components are invested in Global Equities and the exposure
to global property via the MET Global Property Fund. Note that the cash balance is uncomfortably
high. We see this as a temporary measure as we are still thinking about the best possible way to
deploy the funds. Note that we are finding it, in general, difficult to invest in an environment that
seems dependent on manipulation by the major central banks to get risky asset prices higher
regardless of business fundamentals.
Our local stock picks had a positive month with our holdings in Anglos (+10.3%), Sasol (+6.0%),
Billiton (+5.1) and Naspers (+2.7%) producing the largest value add. Our low weighting to the two
platinum stocks (Amplats +16.9%) and (Implats +17.0%) detracted the most value while our holdings
in Richemont (+0.8%) and British American Tobacco (-2.6%) also detracted somewhat over the
month.
At an asset allocation level, given, the macro uncertainty created by the potential of the USA yield
curve to normalize, we are comfortable right now with the exposure to risky assets. However should
opportunities (great value) emerge we will utilise the cash to add the relevant exposure to the
portfolio.
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MET High Yield Fund
Size of fund at 31st August 2013: R14.4m
Monthly performance: 1.02%
Note that this fund should be measured in terms of its objective and not the general equity peer
group or a fixed benchmark index. A key metric that we believe is important is to place more
emphasis on is the expected future dividend stream of each company than to manage the capital
value of each share. In other words, despite a great company being possibly expensive in the short
term we should focus more on the future dividends that it can generate rather than to sell the share
and lose out on the expected income.
The fund’s return in August was once again significantly different to that of the general equity
category due to this focus on dividends. The outcome of this philosophy and approach is that the
investment performance (total return) is likely to be well uncorrelated to the general unit trusts.
Our top shares in the portfolio produced the following returns for August:
British American
Tobacco -2.6%, Sasol +6.0%, MTN +1.4%, Coronation +2.0%, Vodacom -0.6%%, Old Mutual -1.2% and
Billiton +5.1%.
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Conclusion:
We are pleased to have followed up our performance numbers with another solid month, giving us
very good quarter and six monthly figures as measured by the respective peer groups. The views
expressed on the markets seem to be coming through!
We continue to exercise diligence in the navigation of these challenging markets, particularly in the
light of the unprecedented central bank intervention.
Kind regards
Steve & Alex
5th September 2013
Disclaimer: The document should not be seen as an offer to purchase any specific product and is not to be
construed as advice or guidance in any form whatsoever. Investors are encouraged to obtain independent
professional investment advice before investing. Investors should be aware that investing in a financial product
entails a level of risk which depends on the nature of the investment. The merits of any investment should be
considered together with the investor’s specific risk profile and investment objectives. Past performance is not
necessarily a guide to future performance. Fluctuations in exchange rates and underlying investments may
cause the value of international investments or underlying investments, if included in the mandate, to go up or
down. Illustrations are not guaranteed but are for illustrative purposes only. Counterpoint Asset Management
is a representative of Momentum Investment Consulting, an Authorised Financial Service Provider (FSP32726).
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Notes: IMF working paper WP/13/183, Capital flows are Fickle: Anytime, Anywhere, John Bluedorn,
Rupa
Duttagupta,
Jaime
Guajardo
and
Petia
Topalova,
August
2013.
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