The local equity market started 2018 with its worst quarter in eight years. However, we expect a more attractive outlook going forward.
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The last quarter was the worst quarter in eight years for the South African equity market.
After a euphoric finish to 2017, the first quarter of 2018 was the worst quarter in eight years for the South African equity market. The biggest contributors to the 6% fall were Naspers, as well as some of the other rand hedges like British American Tobacco and Reinet. We also witnessed a sell-off in the property sector (due to the investigation into the Resilient group of companies), as well as the platinum and gold sectors, which came under pressure from a strong rand and a fall in the prices of some of the precious metals.
On the positive side, we continued to see strong performance from stocks with greater exposure to the South African economy – especially the general retailers, the auto sector, the construction sector and the banks. This strong performance helped offset some of the negative impact from the big rand-hedge stocks.
Our local equity funds had a particularly good quarter.
Our local equity funds materially outperformed their benchmarks, supported by our significant position in domestic cyclicals as well as in small cap stocks. Stocks that contributed to performance included Hudaco and Altron. Those that detracted somewhat from performance were our investments in Northam and Reinet, which were affected by the strong currency and the weaker precious metal prices.
There are a number of reasons to be optimistic about South African equities.
In the last quarter, Moody’s sustained its credit rating for South Africa and we saw a cut in interest rates. However, we shouldn’t be naive about the challenges that we face on the political front and to kick-starting economic growth.
Having said that, we remain extremely bullish on the prospects for value. In fact, there are two reasons why we think that value is probably the best contrarian trade in the market at the moment:
1. The relative valuations of some of the SA Inc. stocks are highly attractive.
2. Value tends to do well in an environment where growth becomes broader and prolific across the economy.
Our local equity funds are well positioned, with a substantial overweight position in domestic cyclical stocks as well as a large position in smaller cap companies.
SIM Value Fund
Denker SCI SA Equity Fund
SIM stands for Sanlam Investment Management. SCI stands for Sanlam Collective Investments.
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