Destiny Investment Newsletter | Q2 2021 in Review

Local economic growth as measured by GDP grew by 1% in the three months through March from the previous quarter. Unfortunately, year-on-year GDP contracted 3.2% which means output is still down from a year ago.

In a surprise move that bodes well for future long-term GDP growth, and the ultimate reduction of the burden on taxpayers, the government announced that it will increase the generation threshold for companies to produce their own electricity without a licence to 100MW. This announcement came in the same week as the sale of 51% of South African Airways (SAA) to a private flight operator.

Since last year’s market lows, most indices have recovered well. The ALSI returned 25.07% for the year to end June, listed property gained 25.17% and the ALBI returned 13.67%. The rand strengthened 17.82% against the US dollar and 13.23% against the euro over the 12 months to end June. The MSCI World Index gave South African investors 14.27% in rand terms.

Local Markets

Unfortunately, In South Africa, the Coronavirus delta variant led to a dramatic increase in cases, overwhelming hospitals in the country’s economic hub – Gauteng. In response to the surge in cases, the government implemented a lockdown which prohibits the sale of alcohol as well as dining-in at restaurants. Such lockdowns come at great cost to the economy and people’s livelihoods. Hopefully, government steps up its efforts to vaccinate the population before the next wave arrives, thereby saving lives and avoiding another costly lockdown.

As a result, the JSE All Share Index ended its winning streak of consecutive monthly gains which began in October 2020. The index gave back some of its stellar year-to-date performance by losing 2.4% for the month of June but is still up over 13% in 2021. Resources was the major detractor as weakening Chinese appetite weighed on metal prices. As a result, gold, PGM and diversified miners were the worst performers.

Events that impacted the South African Market during Q2 2021

Broad overview of the SA Equity Market

• SA listed companies that derive greater than 70% of their income outside of South Africa (rand-hedge counters) and depend less on the fortunes of the South African economy are favourably reflecting underlying risks and opportunities.

• If all remains equal, this is bullish for the overall market in the current environment as its valuations reflect healthy discounts relative to both DM peers as well as EM peers.

• SA-Inc equities could be on the brink of a powerful 5-year to 10-year bull market.

• SA rand-hedge resources counters, despite having experienced a very strong rally since last year, are still trading at valuations that reflect material discounts if the spot prices for the various underlying commodities are used.

• Resource counters have thus far, meaningfully underperformed recent commodity price strength, and can continue to perform well, even during some commodity price weakness through the remainder of the year.

Broad overview of SA Fixed Income Market

• SA Fixed Income assets continue to look attractive to foreign investors however, there is a level of doubt around the ability of various entities to pay floating and fixed rate instalments (coupons) on their borrowings.

• Fixed Income Managers seemed to share the common view that the distance to default for SA Government on its debt was still broadly remote over the short term to medium term, but high levels of caution were still warranted.

• Fixed Income Managers argued that if SA inflation remains well anchored in the short to medium term then the new normal of interest rates in SA will be lower than has been the case in the past.

Global Markets

Despite elevated inflation readings coming out of the US, the upward trend of value style investing came to an abrupt pause post the Fed’s June monetary policy meeting. Fed officials hinted at a reduced monetary policy response as the world’s largest economy bounced back quicker than anticipated. In turn, technology favourites reasserted themselves as market leaders, while cyclicals became the laggards.

Events that impacted Global Markets during Q2 2021

Global Equities: Still ahead Over five and ten years

For the five years to June 2021, the ALSI returned 8.11% per year (over the past 10 years this figure stands at a more acceptable 10.92%). As the worst performer over the most recent five-year period, listed property (the SAPY) returned -6.85% annualised (4.2% over 10 years). Bonds, at 9.16% returned more than local listed equities over the past five years, but lags equity at 8.53% over 10 years. The MSCI World Index (developed market equities) returned 14.04% p.a. in rand terms over the past five years and 19.2% p.a. over 10 years, comfortably beating all major SA asset classes.

Destiny Portfolios

The GIB Investment team is extremely pleased with Destiny’s performance, but it must be borne in mind that our focus is not on short-term results but rather on long-term sustainability.

Importantly, returns cannot be reviewed in isolation and therefore we have included the Industry Survey to 30 June 2021.

Destiny Portfolios: The way forward

With a view that global equities will outperform local equities over the long term, GIB decided to increase the offshore allocation of all Destiny Portfolios in the third quarter of 2021, closer to the 30% allocation limit of regulation 28 of the Pension Funds Act.