MONTHLY MUSINGS FROM COUNTERPOINT ASSET MANAGEMENT – October 2013
Introduction:
Central bank actions continue to obsess the collective investment mind, and with reason; little else
seems remotely as important on the global investment landscape. Once the fears of a US debt
default were out of the way and an agreement was reached on the US budget, the risk-on
environment returned. The Fed-stoked equity run that had started in September continued in
October, with both South African and US equity markets breaching new highs. Bond markets initially
also took heart from the good news of continued liquidity support from the Federal Reserve, with US
treasuries rallying below the 2.50% level on the US 10y treasury. However, the markets have since
seemed to have interpreted the October FOMC report as having taken a hawkish tone. The date of
the expected Fed tapering, after initially have been put out from September 2013 to March 2014,
certainly has come in by a few months, with the body of opinion setting the date for the first taper
as January 2014.
On the business side, we continue to progress well on most fronts with much time and effort going
into converting our existing trading agreements with our brokers to our own name. As far as flows
go, we had another solid month, gaining R62,2m in assets under management for the month,
R47,3m of which was net inflows. AUM at the end of October was R1065,96m against the endSeptember figure of R1000,8m. We are very cognisant of the weight of money entrusted to us, and
we continually look at ways to challenge ourselves to make our investment returns even more
reliable and consistent.
Financial Markets:
Of course, the prize for central banks would be to see the liquidity they have created converting into
real economic growth. They would then have won the hard earned game they have been playing, or
if you like the experiment they have been conducting since they first reacted with extraordinary
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measures to the global financial crisis. If economic growth gains traction, the rise in bond yields,
when tapering starts, should not have that dramatic an effect on equity markets as (i) earnings will
be supported and (ii) growth in incomes should make the higher interest repayments affordable. US
Economic data has however proved a mixed bag, with especially the October US non-farm payrolls
number disappointing badly. Fed watchers require the number to be above 200k before beginning
to take comfort in tapering. We are not there yet (see Chart 1).
Chart 1. US Monthly non-farm Payrolls. Needs to sustainably breach 200k for Fed to taper?
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Monthly Payrolls, 1000's
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Given the importance placed by the Fed on this employment measure, the markets rallied on the
expectations of its continued provision of liquidity. That is to say, the risky assets are reacting more
on the continued supply of liquidity than on improving economic fundamentals. Also, in the current
reporting season, one observes the average beat proportions for both sales and EPS as being below
historic averages in Europe and the US (see Chart 2). This indicates that top-line growth remains
elusive, and that management continues to achieve profits expectations either by squeezing out
costs or managing earnings expectation downwards. In our opinion, this is not indicative of a robust
state of affairs.
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Chart 2. Eurozone and US proportion of beats in the 2013 Q3 reporting season.
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Eurostoxx
600 Sales
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Earnings
S&P 500
Sales
S&P 500
Earnings
Nikkei Sales
Nikkei
Earnings
Sales or Earnings Beat Proportion
Long Term Avg Beat Proportion
Source: Bloomberg, Deutsche Bank.
In contrast to this, measures such as the Chicago PMI surprised significantly on the high side of
expectations, whereas the October US PMI, as well as those for the Eurozone, printed just above 50,
all indicative of a mild economic expansion. A key concern to emerge out of Europe was the weak
CPI numbers for October. Overall Eurozone headline October y/y CPI inflation printed a
disappointing 0.7% when the market expectation was for a rise of 1.1%, fueling fears of deflation
and expectations of a rate cut from the ECB (see Chart 3). If this materializes, it should provide
further support for the European financial markets, provided real fears of deflation do not emerge.
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Chart 3. More European fuel for the Global Liquidity pool? Overall Eurozone Headline y/y CPI.
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In the background however, the rhetoric against easy money continues to beat increasingly louder.
The excess liquidity is going not into inflation as measured by CPI, but rather into the inflating of
assets, particularly equity markets and corporate bond prices. Liquidity is also fueling leverage and
speculation, it is claimed, making the market increasingly skittish towards the withdrawal of easy
money. Certainly the plot of inflation-adjusted NYSE total margin debt versus the level of the market
bears this out (see Chart 4). The real test, however, still remains the earnings numbers, which up to
now have been supportive of the market (see Chart 5). Any disappointment on this front should
adversely affect the market, especially given the PE multiple expansion that has occurred over the
past year.
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S&P 500 Index Value
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Inflation Adj. Margin Debt Index
Chart 4. NYSE Inflation-Adjusted Margin debt and the S&P500
S&P 500 Index
Chart 5. Earnings supportive of US equity market, unlike in 1999. S&P500 and S&P500 Adjusted
Earnings
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In South Africa, the medium term budget policy statement (MTBPS) and the poor trade numbers had
a negative effect of the rand and the bonds. The MTBPS showed slippage in fiscal metrics, which
negatively impacted the country’s creditworthiness. The treasury’s forecast for economic growth
was revised downwards, down by 0.5% to a more credible growth rate of 2.1% for 2013, with growth
forecast at 2.9% for 2014. This year’s net borrowing requirement was forecast to be lower at
R168.5bn. However, this came at the expense of raising domestic net borrowing by R6bn and R11bn
higher over each of the next two years. The 2013/4 budget deficit is forecast at -4.2% of GDP, which
is rather large in emerging market space and will require the continued goodwill of foreigners to
finance.
The SA September trade deficit printed –ZAR18.9bn, which was wider than the Bloomberg
consensus of -ZAR16.4bn. The motor industry strike is largely reflected in the numbers, with the
transport category exports down –ZAR4.4bn m/m. To the extent that strikes cease and South
African business and labour show goodwill to each other, the numbers ought to improve. What is
disconcerting at this stage of the cycle is that the weaker rand has yet to translate meaningfully into
a better trade balance (See Chart 6). The signal offered by the numbers is not encouraging thus far.
Chart 6. South Africa Trade Balance: No turn-around despite weaker ZAR…
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exports yoy
imports yoy
Global equity markets continued their rise after falling over the first part of the month dominated by
the US fiscal impasse. The MSCI World index gained 3.9% over the month, and the MSCI world index
gained 4.9%. The local All Share index gave a comparative return of 3.3% in USD over the month
(3.61% in ZAR), owing to the ZAR depreciation of 0.3% over the month. The other major SA asset
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classes faired poorer than equities, with the JSE All bond index returning 0.39% in October, cash
returning 0.43%, inflation-linked bonds 1.32% and the preference share index 0.41%. All in all,
October 2013 was a good month for South African asset classes with no asset class registering a
negative return over the period.
Investment strategy
The continued SA rally in equities pushed the market as a whole to even loftier valuation levels,
especially for some selected stocks. We continue to monitor the earnings of companies for signs of
faltering earnings, whist remaining slightly underweight the local equity market. Our overweight
overseas assets position continues be a good call despite the undervaluation of the ZAR. As for the
bond market, we took a trading position in bonds in light of the disappointment of tapering by the
Fed, a move which has not paid off in the short term given the bad SA specific macro news that
emerged since then. This is a position we continue to monitor closely. For the present we are going
to remain with our central positioning (includes an above average weighting in cash), but will remain
vigilant to opportunistic value propositions should they arise.
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 commentaries used in our monthly fact sheets.
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Fund specifics:
MET Enhanced Income Fund
Size of fund at 31st October 2013: R269.1m
Monthly performance: 0.38%
October was a month where inflation linked debt performed best in the non-equity space. This asset
class was the top stellar performer (1.32%) in an otherwise low performing market with the ALBI, the
STeFI index and the preference share index all recording cash-like returns of around 0.4% for the
month.
The bulk of our exposure is to floating rate notes. We still like the low duration of these instruments
and this might prove to be a strong performance enhancer over the next two years as policy rates
start normalizing. We are continuously looking for paper to add to this collection in order to bolster
the running yield of the fund. Nevertheless, we are astute with how we pick new names – the risk
return trade-off needs to work in our analysis.
In previous monthly comments we have mentioned our reluctance to buy long duration paper, given
our base case for the path and direction of the US benchmark bond. This view has been tempered
by recent developments in the US – a 16 day federal government shutdown, weak labour numbers
and an increasing risk that tapering may be postponed to well into 2014 all contributed to the US
benchmark bond yield trading lower than previously anticipated by the Counterpoint team.
On the back of these recent developments we have opted to buy some fixed rate paper as a hedge
against a longer, drawn-out recovery that may involve US treasuries trading lower for longer. This
action should partially protect the portfolio’s relative performance should interest rates temporarily
decline.
Our underweight in inflation linkers and listed property clearly hurt our relative performance in
October – however these asset classes are not a one way bet. There have been three months in the
current year where the CILI index underperformed the ALBI by 200 basis points. The same argument
applies to the listed property index, which printed a whopping -11% performance for the month of
May 2013. We however, continue to monitor these asset classes for suitable entry points.
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 October 2013: R269.9m
Monthly performance: 1.70%
Central bank actions continue to obsess the collective investment mind, and with reason; little else
seems remotely as important on the global investment landscape. Once the fears of a US debt
default were out of the way and an agreement was reached on the US budget, the risk-on
environment returned. The Fed-stoked equity run that had started in September continued in
October, with both South African and US equity markets breaching new highs. Bond markets initially
also took heart from the good news of continued liquidity support from the Federal Reserve, with US
treasuries rallying below the 2.50% level on the US 10y treasury. However, the markets have since
seemed to have interpreted the October FOMC report as having taken a hawkish tone. The date of
the expected Fed tapering, after initially have been put out from September 2013 to March 2014,
certainly has come in by a few months, with the body of opinion setting the date for the first taper
as January 2014.
The only major change over the month from an asset allocation point of view was to buy back the
local equity hedge that was put in place in September.
Our stock picks for the month were negative as compared to the SWIX All Share Index. The shares
that made the most positive contribution over the month were British American Tobacco, BHP
Billiton, Firstrand and Liberty Holdings. However, the area that detracted the most over the month
was in Consumer Discretionary, with our underweight positions in Steinhoff, Foschini, Truworths and
Mr Price contributing the most to the fund’s underperformance. Being overweight Vodacom and
Anglos and underweight Shoprite and Lifecare were further negative contributors.
At an asset allocation level, given, the macro uncertainty created by the Fed and the potential of the
USA yield curve to normalize, we are comfortable right now with the exposure to risky assets.
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MET Value Fund
Size of fund at 31st October 2013: R150.7m
Monthly performance: 3.34%
The performance outcome for October proved to be a challenging one for the fund when measured
against the internal benchmark of the SWIX All Share Index and the average of the peer group over
the month.
Central bank actions continue to obsess the collective investment mind, and with reason; little else
seems remotely as important on the global investment landscape. Once the fears of a US debt
default were out of the way and an agreement was reached on the US budget, the risk-on
environment returned. The Fed-stoked equity run that had started in September continued in
October, with both South African and US equity markets breaching new highs.
Our stock picks for the month were negative as compared to the SWIX All Share Index. The shares
that made the most positive contribution over the month were British American Tobacco, BHP
Billiton, Firstrand and Liberty Holdings. However, the area that detracted the most over the month
was in Consumer Discretionary, with our underweight positions in Steinhoff, Foschini, Truworths and
Mr Price contributing the most to the fund’s underperformance. Being overweight Vodacom and
Anglos and underweight Shoprite and Lifecare were further negative contributors.
There were no significant trades that took place during the month.
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MET Moderate Balanced Fund
Size of fund at 31st October 2013: R72.6m
Monthly performance: 1.92%
Central bank actions continue to obsess the collective investment mind, and with reason; little else
seems remotely as important on the global investment landscape. Once the fears of a US debt
default were out of the way and an agreement was reached on the US budget, the risk-on
environment returned. The Fed-stoked equity run that had started in September continued in
October, with both South African and US equity markets breaching new highs. Bond markets initially
also took heart from the good news of continued liquidity support from the Federal Reserve, with US
treasuries rallying below the 2.50% level on the US 10y treasury. However, the markets have since
seemed to have interpreted the October FOMC report as having taken a hawkish tone. The date of
the expected Fed tapering, after initially have been put out from September 2013 to March 2014,
certainly has come in by a few months, with the body of opinion setting the date for the first taper
as January 2014.
The only major change over the month from an asset allocation point of view was to buy back the
local equity hedge that was put in place in September.
Our stock picks for the month were negative as compared to the SWIX All Share Index. The shares
that made the most positive contribution over the month were British American Tobacco, BHP
Billiton, Firstrand and Liberty Holdings. However, the area that detracted the most over the month
was in Consumer Discretionary, with our underweight positions in Steinhoff, Foschini, Truworths and
Mr Price contributing the most to the fund’s underperformance. Being overweight Vodacom and
Anglos and underweight Shoprite and Lifecare were further negative contributors.
At an asset allocation level, given, the macro uncertainty created by the Fed and the potential of the
USA yield curve to normalize, we are comfortable right now with the exposure to risky assets.
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MET Balanced Plus Fund
Size of fund at 31st October 2013: R284.7m
Monthly performance: 2.20%
Central bank actions continue to obsess the collective investment mind, and with reason; little else
seems remotely as important on the global investment landscape. Once the fears of a US debt
default were out of the way and an agreement was reached on the US budget, the risk-on
environment returned. The Fed-stoked equity run that had started in September continued in
October, with both South African and US equity markets breaching new highs. Bond markets initially
also took heart from the good news of continued liquidity support from the Federal Reserve, with US
treasuries rallying below the 2.50% level on the US 10y treasury. However, the markets have since
seemed to have interpreted the October FOMC report as having taken a hawkish tone. The date of
the expected Fed tapering, after initially have been put out from September 2013 to March 2014,
certainly has come in by a few months, with the body of opinion setting the date for the first taper
as January 2014.
The only major change over the month from an asset allocation point of view was to buy back the
local equity hedge that was put in place in September.
Our stock picks for the month were negative as compared to the SWIX All Share Index. The shares
that made the most positive contribution over the month were British American Tobacco, BHP
Billiton, Firstrand and Liberty Holdings. However, the area that detracted the most over the month
was in Consumer Discretionary, with our underweight positions in Steinhoff, Foschini, Truworths and
Mr Price contributing the most to the fund’s underperformance. Being overweight Vodacom and
Anglos and underweight Shoprite and Lifecare were further negative contributors.
At an asset allocation level, given, the macro uncertainty created by the Fed and the potential of the
USA yield curve to normalize, we are comfortable right now with the exposure to risky assets.
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MET High Yield Fund
Size of fund at 31st October 2013: R19.0m
Monthly performance: 3.69%
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 October was once again 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 uncorrelated to the general unit trusts.
Our top shares in the portfolio produced the following returns for October:
British American
Tobacco +3.4%, Billiton +3.9%, Sasol +7.1%, MTN +1.8%, Coronation +19.4% and Vodacom -7.6%.
There were no significant trades that took place during the month.
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Conclusion:
October was a month of consolidation after the tough previous month. However, we remain
resolute in the way we go about our daily tasks and strongly believe that in the longer term our
approach will win out.
Kind regards
Steve and Alex
7th November 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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