In order to enable us to review the performance of various asset classes in our global universe of investment opportunities, over the past quarter, as well as over the medium to long term, in the context of our investment strategy, we outline our high level portfolio positioning, in terms of our levels of conviction towards different investment opportunities.

Our high conviction investment ideas are:

1. Africa listed property markets
2. Emerging listed property markets
3. China Equity markets
4. Emerging equity markets
5. Africa equity markets
6. European equity markets

Our neutral conviction investment ideas are:

1. Developed equity markets
2. Developed property markets
3. Local equity markets
4. Local listed property markets

Our lowest conviction investment ideas are:

1. Local fixed interest
2. Offshore fixed intrest

Against this framework, we also note that the three main factors that continue to dominate investment strategy, and thus market performance are: policy/liquidity settings, the global economic growth trajectory and fundamental asset class valuations. Of these we believe that, the main driver of performance over the past quarter was the policy / liquidity factor. In particular, we believe that the theme of “lower interest rates for longer” , has been strengthened across the markets, over the past few months. This has in turn further intensified the search for yield, pushing the valuations of a number of investment opportunities further into expensive territory. The past quarter, in particular saw global capital flows favouring emerging markets, which supported the performance of these markets and went a long way in stabilising their currencies.

Stringfellow – Q2 Investment Report – 2014

Two key factors dominating the current market and economic environment are policy ( both fiscal and monetary, but mainly monetary) and economic growth. Post the market crash of 2008/2009, policy across the globe has been geared at reviving economic growth, which has seen interest rates reduced to record low levels. A gradual synchronization of economic growth across the major economic hubs of the USA, Japan, Europe and Japan in the latter half of 2013, fuelled expectations of policy rate normalisation, with the FED beginning this initiative through the tapering of its quantitative easing policy. In addition to aggressive pricing of interest rate hikes within both local and offshore forward rate markets, this saw a partial reversal of capital flows from emerging markets to developed markets, and consequently resulted in significant losses being experienced across most emerging market assets as well as currencies.

The negative inflation implications associated with the substantially weaker currencies, saw a broad based de-rating across all local fixed interest asset classes, with the exception of local cash, in January, as shown in the performance table below.

Stringfellow – Q12014 Investment Report

Property was the top performing fixed interest asset class for the year 2013, where it delivered a return of 8.39%. This was 3% ahead of the cash return of 5.18% for the year. Bonds, both nominal and inflation linked, failed to recover from the losses that they incurred following investors’ over-reaction to the FED signalling its intention to begin slowing down its asset purchasing programme. Within nominal bonds, the long end of the curve (7 years and above) detracted the most value, while the short end of the curve (3 years and less), was up by 4.40%. The outlook for nominal bonds is worrisome given expectations for a continued recovery in global economic growth. This could see real yields gradually grinding higher, and in the process impairing prospective returns from this asset class. This potential bond market environment will prove to be very difficult for local flexible fixed income managers, who may find it very difficult to outperform cash over the next 12 months.

The outlook for listed property, following its correction in May last year appears more positive when compared to that of nominal bonds. It continues to be supported by robust above inflation distribution growth, and at current dividend yields of over 7%, its prospects against cash look reasonable. Barring an earlier than expected turn in the interest rate cycle, we are generally positive on this asset class and have a neutral to overweight allocation to it across all of our portfolios.

Stringfellow – Q42013 Investment Report