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Chairman's Report |
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Economy and Markets |
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First-quarter 2008 economic data
pointed to intensifying inflationary pressures, weak demand
conditions and increasing prospects of yet another interest-rate
increase. Local markets fell in line with their global
counterparts, while bond yields remained high on renewed
concerns about the local inflation outlook. Investment Solutions
continues to be concerned that the less favourable global
economy, rising inflation and supply constraints -- mainly
limited electricity-generation capacity -- will result in 2008
being a difficult year for corporate earnings delivery. |
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Despite increased short-term
pressures, the company believes the local macroeconomic
environment remains sound. Macroeconomic fundamentals have
improved significantly on the back of comprehensive economic
reforms. Fiscal prudence has reduced government’s debt
obligations, foreign-exchange reserves have risen to their
highest on record, and monetary and fiscal policy transparency
has enhanced policy credibility. The economy is thus better
placed to deal with macroeconomic shocks, one of which is
elevated price pressures. |
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Inflation rose further in February
2008, with CPIX up to 9.4% year on year as rapidly rising food
and fuel prices continued to exert upward pressure. CPIX has
been above the critical 6% for 11 months in succession and is
set to remain so for the foreseeable future. Indications are
that this period could match that of 2002 to 2003, when CPIX
remained outside the target band for 22 months in succession.
Food inflation remains sticky at around 14% and this, combined
with the rapid increase in energy costs, suggests inflationary
pressures will persist. Elevated global oil prices and rand
weakness have pushed local fuel prices up 20% since the
beginning of this year. Additionally, power utility Eskom has
proposed to increase electricity tariffs by around 53% -- as
opposed to the originally approved 14.2%. All these point to
sustained inflationary pressures, a situation that suggests CPIX
is unlikely to drop to within the target range this year. |
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The rand remained under pressure.
After recovering to R7.75/$ in late February, the local unit
weakened steadily in March, closing the month at R8.09/$.
Against the euro and the pound it weakened to R12.79 and R16.03
from R11.88 and R15.41 respectively. On a real trade-weighted
basis -- Investment Solutions’ preferred method of exchange-rate
valuations -- the rand has lost around 16.8% since the beginning
of this year. The rand also continues to underperform other
resource-based currencies such as the Australian dollar and
Brazilian real. Even relative to the currencies of other
economies with high current-account deficits that are perceived
to be vulnerable (Hungarian forint, Turkish lira etc), the rand
has underperformed. Investment Solutions maintains the rand is
slightly undervalued relative to its peer currencies. The local
unit, however, remains vulnerable to further weakness due to the
large current-account deficit. This remained large in 2007 but
compared favourably with the deficits of other commodity-based
economies such as Australia and New Zealand. Investment
Solutions, however, has previously highlighted that the current
account on its own is not a problem. It is always the
current-account deficit and something else -- in this case, the
slowing local growth on the back of higher interest rates and
production constraints -- that make the rand vulnerable. |
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Investment Solutions remains
confident that local macroeconomic stability can be maintained
amid the intensified short-term pressures. Although economic
growth will slow in 2008 due to less favourable conditions, it
will remain reasonably firm. Fixed investment spending will be a
key driver of growth in the coming years. |
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Investment Returns
The unit trust sector remains competitive even in these uncertain
times. Thirteen new unit trusts were launched in the past 12 months,
taking the total to 844 and assets under management to R658 billion.
Despite a very challenging period, the Property, Income, Superior
Cash and US Dollar Cash Feeder portfolios all delivered returns
above their respective benchmarks for the 12-month period ending
March 2008. |
Dave Tennick |
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The remaining portfolios underperformed their
benchmarks over the same period but we remain confident that this
situation will be reversed over the longer term. |
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Changes
In early 2008, Investment Solutions launched the Institutional
Equity Unit Trust. The new fund was launched to cater for investors
who prefer a more conservatively managed fund compared to our retail
offering. Our institutional portfolio is benchmark cognisant and
targeted to beat the SWIX whereas our retail offering aims to beat
peers. During the period under review, there was a cancellation of
units in the Multi-Manager Equity Unit Trust to the amount of R3.7
billion which was a result of the Alexander Forbes Profile Range
changing its equity building-block from the Multi-Manager Equity
portfolio to an alternative Investment Solutions portfolio.
The company changed the underlying investment manager in the
Property Equity Unit Trust as a result of concerns following Old
Mutual Investment Group’s acquisition of Marriott. The company’s
investment team continues to monitor and, where necessary, change
underlying investment managers.
Conclusion
As noted in my report to you last year the past 12 months have been
challenging for investment markets. The outlook remains difficult
and we can expect volatile markets.
Although we remain concerned that the next year will be a difficult
one, Investment Solutions remains confident its investment process,
philosophy and depth of resources will continue to add value and
build wealth for its clients.
I thank you for your continued support.
Yours sincerely |
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Dave Tennick
Chairman |
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Printed Version |
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