Myplan – The Equity Market’s Surge

After a surge in equity markets during July, August saw global equities sell off across the board. Global equities declined by 3.9% in Rands. Catalysts for the sell-off included further declines in high-frequency leading economic indicators in the US, China, Japan and the Eurozone and further declines in US and Chinese new orders to inventory ratios. The significance of the latter is that inventory rebuilding will be less of a growth driver going forward.

Disappointing US payrolls data and a sharp decline in US housing data added to the negative sentiment on markets, reigniting fears of a double dip recession. The VIX Index (measure of global risk appetite) also increased during August in line with the market’s overall risk aversion, ending August at a level of 26.05%, up from 23.5% at the end of July.

Global bonds were the best performing asset class in August as fears of a double dip recession intensified following indications that the slowdown in the world economy was more pronounced than previously anticipated. Domestic bonds yielded 3.0% in August, underperforming global bonds (3.3%) and emerging market bonds (3.6%).

The Myplan Assertive Wrap managed to mitigate a significant amount of downside in tough market conditions presented in August, producing a return of -0.21% when the equity market declined by -3.58%. The Portable Alpha strategy (Prudential Optimal) was the best performing strategy and managed to outperform cash, due to value add through the manager’s stock selection. Even though the Value Biased Equity (Coronation Absolute and Re:CM Flexible Equity) and Protected Equity (Prescient Positive Return) strategies underperforming relative to the other underlying strategies, the must be commended for the downside properties they exhibited in August, producing – 0.15%, -0.87% and -0.10% respectively. This further instills conviction in our approach to managing absolute return portfolios.

SMMI remains of the view that a cautious approach is prudent, given the market volatility. Equities, still however, look reasonably attractive over the next 2-3 years, but over the short term we believe the market to be fairly priced. Bonds both locally and globally are quite expensive, given the recent purchases of these instruments and an underweight position is well warranted.

This article has been reprinted with the kind permission of Myplan.
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