2019 was a tough year, with growth slowing to its weakest level since the Global Financial Crisis. Global activity was hamstrung by major policy uncertainty. Key was the
ongoing Trade War between the US and China, with BREXIT and geopolitical events in the Middle East and Asia adding to the uncertainty. These caused a collapse in global
trade, manufacturing, and investment. Against these, household consumption in more advanced economies remained supportive, preventing a sharper global slowdown, as job
markets continued to benefit from an expansion in services activity. The Middle East saw attacks on oil infrastructure and shipping. In Asia, protests in Hong Kong plunged its
economy in recession.

The year ended with resolutions to two major sources of uncertainty. The US and China agreed to a so-called Phase 1 trade deal before another round of tariff escalations took
effect, with the deal expected to be signed by mid-January. The UK held a General Election which resulted in a decisive majority for the incumbent Tory party. Central banks
responded aggressively to last-year’s slowdown, easing policy both with respect to interest rates and re-extending quantitative easing, with fiscal support in some countries like
China also helping. Although major central banks like the US Fed have signalled a pause, subdued inflation means that they will not be in a hurry to reverse course. The
combination of last year’s policy easing and the resolution of major uncertainties set the stage for a rebound in activity in 2020. Two immediate risks weigh on the outlook. US
President Donald Trump faces an impeachment trial in the US Senate after having been impeached by the House of Representatives. And a major geopolitical event in the Middle
East risks plunging the region into war.

In South Africa, 2019 proved a dismal year, as an expected rebound instead translated into an even weaker performance than the previous year. The outcome was driven by
ongoing supply disruptions stemming mainly from load shedding, with labour disputes in sectors like mining and adverse weather in agriculture adding to the weak
performance. The supply disruptions also weighed heavily on confidence, which further undermined underlying activity. Though a recovery is expected in 2020, it is likely to
be mediocre. Supply constraints in key network sectors like electricity will remain, as the process of restructuring flailing SOE’s will take time. The upcoming February Budget
will be keenly-watched for signs that the deterioration in the fiscal position is at least being arrested, and that the necessary reforms are being implemented to sort out failing
SOE’s, restructure the supply-side of the economy to increase its competitiveness and boost the efficiency of service delivery. Fiscal space is severely limited and the country is
still expected to lose its last-remaining investment grade. And confidence will remain depressed in the absence of tangible evidence that the downward spiral caused by a decade of mismanagement is being arrested.

Global equity markets proved to be stronger than expected in 2019, with major indices posting gains in excess of 20%1. The FTSE/JSE Africa All Share Index erased the losses
incurred in quarter 3 by gaining 4.6% in the last quarter of 2019, driven mainly by an outperformance of resources of 13.5% over the same period2. General retailers and Banks
were the major losers over the quarter while financials edge up again in December, leading to 2.8% over the quarter3. As we enter 2020, the South Africa’s budget, due to be
presented next month, is looming as a key first-quarter event as and any credible effort by the government to avoid a potential credit downgrade and reducing government debt
levels will provide a boost to sentiment. Nevertheless, the local bourse continues to be attractively valued and should provide potential upside in comparison to international
markets. However, we continue to emphasise diversification and robust stock selection in our portfolio construction and tactical allocations.

The global fixed income market surprised in 2019, by rallying for much of the year. Not so far ago, in 2018, most believed the Federal Reserve (Fed) would continue to tighten
monetary policy by raising its policy rate. SA bonds investors enjoyed a favourable environment in 2019, supported by a positive inflation outlook and attractive valuation,
relative to emerging market peers. Inflation was contained around SARB’s mind-point target of 4.5%, averaging 4.3% over the year. Government bonds have provided a
risk-rewarding yield, well ahead of inflation of close to 9% on an annualised basis. Going into 2020, the same environment is expected to prevail as SA bond yields and valuations
remains attractive. This is mainly driven by the government borrowing requirements. South Africa currently runs a twin deficit, i.e. both on its current account and budget
account. The overspending by the government has to be financed by offshore sources and in order to attract inflows, the SARB has to keep real interest rates higher than it
otherwise would have done.

This fiscal predicament will not be resolved any time soon and the higher real interest rates and positive income environment will remain in place. However, there are a few key
domestic risks, such as state of the fiscus, progress of reforms and a potential downgrade from Moody’s that would trigger foreign capital outflows. This could lead to bond
market weakness and rand depreciation amid the poor economic backdrop. Nevertheless, risks and uncertainties abound, but due to the inflation-beating income environment,
we believe that SA fixed income market will still offer attractive opportunities in 2020.

Our balanced portfolios are well diversified across geographies, currencies, asset classes, sectors and instruments. This appropriate level of diversification allows for a relatively
lower level of risk and the fund is positioned to generate real returns for our clients over the long term.