June saw volatile trade around the globe, with emerging markets (EMs), including South Africa (SA), remaining under pressure for most of the month amid continued fears about a possible trade war. However, despite these concerns the JSE ended June on a positive note as the FTSE JSE All Share Index (J203) gained 2.6% MoM (down 3.2% YTD). Financial counters felt the most pressure with the FINI-15 dropping 2.8% MoM (-9.7% YTD), while Industrials closed 4.6% higher MoM (-4.7% YTD). Resource counters performed well as a rally in some commodity prices buoyed the Resi-10 to end June 6.4% in the green (the index is now up an impressive 16.1% YTD).
Market-heavyweight commodity companies, including BHP Billiton (a 8.8% weighting in the J203), and Anglo American (4.1% of the index), posted robust monthly gains of 7.4% and 1.6%, respectively. Meanwhile, industrial counters such as British American Tobacco (with a 2.4% J203 weighting) and Naspers (with its notable 20% index weighting) jumped by 6.7% and 15.2% MoM, respectively, lifting the local bourse.
The rand lost significant ground (-8.1% MoM) during the month on the back of a rampant dollar, negative EM sentiment and weak domestic economic data, especially the poor 1Q18 gross domestic product (GDP) showing.
Data at the start of June showed that GDP plummeted 2.2% in 1Q18 (vs a 3.1% QoQ increase in 4Q17) – the largest QoQ decline since 1Q09, according to Stats SA. YoY, GDP grew 0.8%. The biggest negative contributors to 1Q18 GDP growth were the agriculture, mining and manufacturing industries. However, May consumer price inflation (CPI) surprised on the downside coming in at 4.4% YoY (vs April’s 4.5% print), despite April’s VAT hike. Most of the increase was due to higher alcohol, tobacco and fuel prices. With local consumers under pressure from all fronts, April retail sales also disappointed as growth contracted 1.2% YoY, vs March’s 0.2% decline and 1.4% growth in February. Bloomberg writes that the latest data reflects the slowest growth in 15 months. Meanwhile, private-sector credit also decelerated to 4.6% YoY in May – its slowest pace since September 2010, according to SA Reserve Bank data.
On the political front, public hearings on the amendment of Section 25 of the Constitution, in order to allow for the expropriation of land without compensation, kicked off in June giving citizens the opportunity to air their views on the highly contentious issue. Health Minister, Aaron Motsoaledi gazetted the bill detailing an ambitious plan to roll out universal health care through a National Health Insurance (NHI), while Mineral Resources Minister Gwede Mantashe unveiled a revamped third Mining Charter.
London-based, Quilter plc, formerly Old Mutual Wealth Management Ltd, was a new addition to the Anchor Capital house-view equity portfolio for June. Our original position in the counter arose through the unbundling of Quilter from Old Mutual Plc. Following the unbundling, we decided to increase our position in the share to 3% (we note this is still to be implemented) as it became apparent to us that Quilter was even more attractively priced than was originally apparent.
Quilter Plc is a vertically integrated, wealth-management operation, which we believe is well positioned to take advantage of the structural shifts in the UK savings market. Old Mutual has been incubating the wealth manager since 2013, when the opportunity arose to bolt-on various wealth businesses across the value chain. Quilter now operates an extensive network of tied agents as well as supplying a support network for over 4,000 independent financial advisors (IFAs) across the UK and, with recent regulatory reforms to the UK asset management industry increasing the regulatory burden on smaller IFAs, the opportunity arose to consolidate in this space. Quilter earns advice and management fees on assets managed in its multi-asset portfolio offering, as well as operating one of the UK’s largest savings platforms.
Our expectation is that Quilter should continue to attract flows from its vast distribution network across middle Britain and for the company’s sustainable operating margin to be in the region of 30% (from an expected 28.5% for FY18). With most of its profits converted to cash, we expect the dividend cover to gradually reduce from 2.2x to 1.8x, with retained profit being deployed into broadening its distribution network. The investment platform has significant excess capacity and the increased revenue should be incremental to the operating margin. With its peers trading at high-teen earnings multiples and dividend yields mostly below 3%, we view Quilter’s forward PE of 13.5x and 3.5% dividend yield (a high single-digit growth trajectory) as an attractive valuation. Importantly, with the real drivers of growth in the industry being the increased need for quality financial advice, this remains supportive of further net inflows.
Liam Hechter, Fund Management