|Obsidian SCI Balanced Fund||1,5%||9,9%|
|Obsidian SCI Equity Fund||1,8%||10,9%|
|Obsidian SCI Multi Asset Retail Hedge Fund||1,6%||11,4%|
|Obsidian SCI Long Short Retail Hedge Fund||0,9%||12,3%|
The big questions
Most asset classes around the world have performed well in the first half of 2019. But the sustainability of the recovery is being questioned because uncertainty still prevails in many corners of the market. Some of the important questions investors are faced with center around the following;
The answers to these questions have a material impact on portfolio construction.
Which assets can help us navigate these challenges?
Financial assets listen to their respective macro environments more keenly than is widely accepted. If you share this view, as we do, then every investment needs to be subjected to the possible outcomes in the bigger picture. And if the risks outweigh the reward, find another investment opportunity.
Equity: Emerging v Developed
There is a smattering of pound and euro denominated equity in our portfolios, but most of our equity exposure remains emerging market (EM) focused – we include our exposure to SA equity in this statement. An expensive US dollar has kept us out of the S&P 500, across all the products we manage, since early 2016.
The worst-case scenario for our current positioning would be for the greenback to strengthen markedly from current levels. We think this unlikely for the following reasons;
As a result of our weak dollar view, we continue to favour equity in emerging markets, particularly cyclical and interest rate sensitive counters.
Select resource shares still have the support of their underlying commodity prices, primarily due to supply side constraints. And interest rate sensitive shares (mostly banks) still exude attractive valuation with a supportive environment – stronger EM currencies (including the rand), falling inflation, and easing monetary policies have historically supported these shares.
Bonds: An all-weather asset
In our multi asset funds we have a material weighting in South African government bonds. They offer an attractive yield and we believe the environment is supportive of rising bond prices (falling yields);
We like bonds because they offer a real return and provide protection if global growth continues to slow. At the same time, if global growth accelerates again, that should support the rand which in turn will support our bonds. From an asset allocation perspective, we prefer SA government bonds to property (of which we hold none); the latter still faces meaningful pressure on their distribution growth.
What worked, what didn’t
Getting the bad news out of the way first, the four material detractors across our portfolios during Q2 2019 were Imperial Brands Tobacco, British American Tobacco, Sasol, and Mediclinic.
We included the tobacco stocks in our portfolios early in 2019 post a huge derating last year. With earnings growth approaching double digits we found their valuations attractive enough to make an investment. In our opinion the perception about the future of the tobacco industry is currently overriding the fundamental appeal of the investment case – which one will win out is hotly debated in our boardroom.
Sasol’s severe lack of cost control at Lake Charles surprised us. We were able to reduce our position when the news broke, but we did catch some of the downside. Our initial investment was made premised on attractive valuations and a view of rising rand oil prices.
Mediclinic is cheap and we think there are earnings tailwinds to come. We may be a little early on this one so patience (and courage!) is required.
ABSA, MTN, Transaction Capital, Altron, Sberbank (Russia), Impala Platinum, Banorte (Mexico), and Anglo Platinum were the key equity contributors, while our SA Government Bond holding chipped in nicely inside our multi asset funds.
The interest rate sensitive shares in our portfolios benefited from falling global bond yields; platinum shares did well in June as both palladium and platinum rebounded; and TCP and AEL continued to be rewarded for superior earnings expectations in a market devoid of growth.
What does the future hold?
We too see significant ambiguity in the signals the market is giving us. The biggest threat to our portfolio is a global recession and a much stronger US dollar; as discussed above, we don’t see this as imminent. However, our domestic equity holding is low compared to historical levels. We are concerned about our local economic growth in the medium term – without a reacceleration, corporate earnings will be hard to come by, a scenario under which we’d rather avoid equity.
If global growth indicators were to get worse in the coming months, we would increasingly look to bonds (or cash in the equity-centric funds) to provide protection. We are also watching the South African commodity export basket very closely as a collapse in those prices would likely threaten our view of a stable-to-stronger rand.