In November 2018 the average prudential balanced portfolio returned -1.73% (October 2018: -2.53%). Top performer is Hangala Prescient Absolute Balanced (-0.24%); while Allan Gray (-3.94%) takes the bottom spot. For the 3-month period, Investment Solutions takes top spot, outperforming the ‘average’ by roughly 1.94%. On the other end of the scale Nam Asset underperformed the ‘average’ by 2.15%.
It’s the dog that wags the tail - how the US economy impacts SA (and Namibia)
The US Repo rate is currently 2.25%.While the US annual CPI has steadily been creeping up from around 0% in January 2015 to 2.95% at the end of July, it has been on the decline again since then, contrary to the Fed’s expectation, to reach 2.18% at the end of November. This means that any US citizen investing in US treasuries is now for the first time since November 2015, earning a positive real interest rate. If this trend continues, the appetite of US investors for equities is likely to wane, removing the underpin of equities in the US and globally. The declining inflation in the US is probably also at least part of the reason why the Fed has no raised the repo rate at its last sitting, contrary to a general expectation that it would. The US needs inflation to deflate its huge debt burden and expected quantitative easing to do this job. It seems though that this strategy has not worked and the risk of deflation is on the rise. This may present major structural challenges and may result in us treading a very uncertain path and in increased market volatility.
A negative real interest rate is clearly not sustainable and is the cause of artificial imbalances in asset valuations that are due to correct once the situation returns to normal as we are starting to see now. The US repo rate should be around 1.5% higher than US CPI, going by historic evidence stretching back to 1988 and up to the onset of the global financial crisis. Based on current US CPI of 2.2%, the US repo rate should be around 4%. Once the repo rate offers a real return of 1.5% or reaches 4% under current inflationary conditions, it would indicate a normalised interest rate environment. At the more recent rate of upward adjustment of the US repo rate and the state of the global economy we are once again looking at around 3 to 4 years now until we reach this point given that we saw 6 increases of 0.25% each over the past 4 years. This of course assumes that the global economy will pick up at the speed it has over the past 4 years, whereas at the moment it could go in either direction. So where will this leave SA?
Read part 6 of the Monthly Review of Portfolio Performance to 30 November 2018 to find out what our investment views are.