The 2nd quarter of 2019 saw the JSE All Share Index (ALSI) follow up the impressive gains recorded in the 1st quarter with another quarter of solid gains. The ALSI’s 3.9% return over the past 3 months takes the ALSI’s year-to-date gain to 12.2%. All 3 major sectors achieved positive gains for the quarter with the Resource, Industrial and Financial sectors returning 2.4%, 4.0% and 5.4% respectively. The ALSI has generated annualised returns of 6.9% and 5.9% over the last 3 and 5 years to 30 June 2019, respectively.

The past quarter was a busy one on the domestic economic and political front. The outcome of the National Election was largely as expected, with the subsequent cabinet announcement and State of the Nation address generally well received. Global rating agencies have expressed mixed opinion on the election outcome with Moody’s positive on the potential for reform. Fitch pointed to the decline in the ruling party’s support and the increasing likelihood of populist policies. Despite some modest improvement in sentiment; economic growth and activity indicators continue to reflect an economy and consumer under strain. SA’s Gross Domestic Product (GDP) declined 3.2% during the 1st quarter of 2019 – the largest quarterly contraction since 2009. The worse than expected GDP decline has seen further moderation of SA’s 2019 annual growth forecasts. On the global front, general economic momentum and activity appears to be moderating in key regions, with no resolution in the ongoing US-China trade dispute. The result of the softening in global activity has seen the growing prospect of increasingly accommodative monetary policies in the US and Eurozone in particular. With benign inflation, even the SA Reserve Bank (SARB) is expected to cut interest rates at their July meeting.

Given the accommodative global background and the fact that the JSE ALSI is trading in line with its 15 year average forward Price Earnings valuation multiple, we see no reason to change our constructive outlook for our core universe of quality companies.

After 2018 proved to be the worst calendar year for domestic equities since 2008, the JSE All Share Index returned a pleasing 8.0% in the 1stquarter of 2019, the best opening quarter since 2007. The Resource Index delivered an impressive 17.8% over the quarter, with Industrials returning 7.4% and Financials -0.4%.

Core holdings British American Tobacco (29.5%), ABInbev(26.7%), BHP Group(21.7%) and Naspers(18.8%) had strong quarters. Naspers unbundled the Multichoice Groupon 27 February with shareholders receiving one new Multichoice share for every 1 Naspers share owned. After coming under pressure initially, the share price recovered well in March returning 14.9%.

Looking ahead, the key event on the local political front will be the National Elections on May8. Of late we have seen various political and market commentators make differing predictions on what an economy (and market) friendly election outcome would look like.

As long-term investors, we look beyond the National Election when constructing equity portfolios. Although we see the potential for various scenarios to play out over the coming months, none are sufficient to significantly alter our positioning ahead of the May 8 election. While domestic focused equity valuations appear to be reflecting the current pessimism, our focus remains on the longer-term and on identifying and holding high quality companies with impressive stewardship, sound fundamentals and sustainable growth prospects.