Economic Comment – Politicians spoil the party
Recent data from the US, such as a reduction in jobless claims, rising industrial production, good housing starts and consumer confidence suggests that US growth has picked up in the final quarter and could exceed 3% on an annualised basis. This good news was overridden, however, by the failure of the US “supercommittee” to finalise plans to reduce the US federal deficit. Due to this, an automatic default deficit plan kicks in, which acts as an immediate break on spending and ends some of Bush’s tax cuts. The economy has some respite, however, as these savings will only start in January 2013 and will be effective over a 10 year period, which give the politicians some more time.
In Europe, politicians appear unable to come up with a sustainable way to save Europe and concerns have started to build up regarding the solvency of other European countries. French, Italian and Spanish bond yields all widened significantly above German bond yields. This has added pressure on policy makers to find a solution around German objections to the ECB buying up European sovereign debt. This is in sharp contrast to the Fed, who are committed to low interest rates till 2013 and who have made massive bond purchases aimed at keeping yields low.
Politics are set to dominate headlines well into next year with presidential elections in the US and a change of guard in China, both in November. This will be the biggest political shift in China in a decade as a new 25 person Politburo, the supreme decision-making body in the country, will be elected. This will give a group of new young leaders the opportunity to exert some influence.
As in the words of Mohammed El Eian, CEO of Pimco, commenting on trends in the market, “this is not a call on companies, it is about the policymaking in Athens, Berlin, Frankfurt, Rome and Washington DC “and he should have added Beijing.
Fund Comment – Added to equities cautiously
During the course of October, we started to add back to direct equities by selling out of the Allan Gray Stable fund and adding to Foord’s Equity fund. This was based on attractive equity valuations, following the 10% drop in the JSE in July/August. The funds benefitted, as local equities staged a 9.3% rally in the month. Resources stocks, in particular did well, up 11.4%. Biliton, Sasol and Anglos, which are well represented in our top ten holdings all followed suit.
Our offshore exposure had great month with equities up 7.4% while global property delivered 8.4%. We have had an exposure to global property since January and with its 22.5% return for the year to date has made an important contribution to our fund’s performance. Although we have added to equities both locally and offshore, we remain cautious given ongoing sovereign debt issues, the high risk of a recession in the Eurozone, the recent failure by the US “supercommittee” and still weak job growth in the US.
Lastly, at Southern Charter, not only do we aim to add value through tactical asset allocation but we also aim to select managers who are world class in what they do. So it is very exciting for us that one of the funds we have selected, the Catalyst Global Real Estate fund, was ranked 1st by Morningstar* out of 54 global real estate funds for their 3 year performance to October. The fund delivered an annualised return of 21.5% in dollar terms over the period.
*Morningstar is an independent research house.
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Chief Investment Officer