Q2-2021 Investment Report

Quarter 2 Quarter 1

Q2 2021 Investment report A review of key global trends, our local market and how it’s informing performance

For institutional and individual investors

Alexander Forbes Investments Limited.

Registration number 1997/000595/06.

ALEXANDER FORBES INVESTMENTS | CONTENT

CONTENT Section one | Chief Investment Officer’s message

3

Section two | Market and economic outlook 6 Section three | Our investment approach

23

Section four | Useful links

26

Disclaimer 28

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ALEXANDER FORBES INVESTMENTS | CHIEF INVESTMENT OFFICER’S MESSAGE

SECTION 1 Chief Investment Officer’s message

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ALEXANDER FORBES INVESTMENTS | CHIEF INVESTMENT OFFICER'S MESSAGE

The past year has shown us that everything can change in a matter of months. This time last year, we were all still very uncertain on when we would receive protectionary measures to safeguard us against the new virus, other than lockdowns and social distancing. Now, we are in the midst of a structured vaccination plan, providing a glimpse of a silver lining to the dark cloud many of us have been under. The past quarter provided a welcomed development in our battle against the pandemic but there remains uncertainty across markets, given the prolonged instability underlying some economies.

Gyongyi King Chief Investment Officer’s message

The second quarter of 2021 has brought increased volatility across most asset classes. Local equity markets had a mixed quarter, generating positive returns in the first two months, however, the returns had started to weaken by June. The FTSE/ JSE All Share Index (ALSI) and Capped Shareholder Weighted Index (Capped SWIX) ended slightly up, while the Shareholder Weighted Index (SWIX) was negative. Bonds performed well in the second quarter, with the All Bond Index (ALBI) up by 6.9% and property even stronger, returning 12%. From a currency perspective, the rand strengthened over the quarter, however, the weakness experienced in June reversed the rand’s strengthening trend that we saw over the last year.

Performance update Despite the turbulent markets, our flagship portfolio, Performer, outperformed its benchmark in the quarter and is outperforming for the year to date. The absolute return is in excess of equity market returns and it reflects the value of our purposeful diversification approach in the portfolio, with exposure to differentiated asset classes and global allocations contributing to the portfolio’s performance.

Generally, most of our portfolios outperformed their benchmarks in the quarter, which is evidence of the true worth of our multimanaged solutions. Similar to Performer, the drivers behind this outperformance can be attributed to the diversified nature of our portfolios. Allocation to different asset classes has meant that the portfolios have a wider opportunity set from which to differentiate returns, and not relying on any one investment to drive performance. In our multi-asset class portfolios, the positive contributors to performance have been the strong performances of local bonds and local property exposures, which have also benefitted local equities such as South African banks and clothing retailers. While our positioning across global assets has been a positive contributor, the active equity component has struggled this quarter. However, to counter this, the Diversified Growth fund that was introduced to most growth portfolios late last year continues to enhance returns over the quarter. This fund offers a pragmatic blend of specialist investment managers and passive strategies across various asset classes that aim to secure equity-like returns cost effectively and with less volatility.

Multi-management: simpler, smoother and safer investments Our investment philosophy is centred on a practical risk management framework that allows us to carefully consider all potential outcomes and manage any risk that might arise in the process. As a multi-manager, we are uniquely positioned to employ a diverse set of investment opportunity sets across asset classes, strategies and asset managers. This means that we can better prepare and respond to shifting trends or changing markets, nimbly shielding your investments from risk or flexing to capture opportunities to deliver better investment outcomes. The result is a smoother and consistent return profile, which can often scale the performance tables over time. |4|

ALEXANDER FORBES INVESTMENTS | CHIEF INVESTMENT OFFICER’S MESSAGE

Over the last quarter, we took a proactive step in highlighting the key benefits of a multi-managed investment approach and reaffirming our leading position in this area of specialisation.

Having the time to implement, monitor and maintain a sound and responsive investment view in an unpredictable and continuously shifting market environment is a luxury that not many investors have – or the skills and acumen to do so.

Throughout the roll-out of this campaign, we demonstrated how our multi-managed offering leverages extensive asset manager research, portfolio management expertise and best-of-breed global investments to offer portfolio solutions that navigate and solve fundamental investor problems, so you don’t have to.

Risk-focused investing The onset of the riots we saw in KwaZulu-Natal and Gauteng during July have been an unfortunate event that has wreaked devastation for many businesses. They were an untimely event that no one had seen coming, and we sympathise with everyone that was affected. The events have struck panic and anxiety in many of us, and we understand that investors might be particularly concerned with how the unrest would affect investee companies, and in turn, their investment outcomes.

Although we cannot eliminate the risk that comes with investing, I would like to take this opportunity to reassure you of our risk-focused instinct, which we apply over our multi-managed approach. As a result of this, we take more responsibility in the construction and management of risks within our portfolio solutions, and are more actively engaged around the allocation of savings and investments by our selected underlying asset managers. Managing our portfolio solutions with a strong focus on risk ensures that no single investment will ever dominate the fortunes of your investment outcomes. Although social and economic events are as difficult to predict as the markets, we maintain a constant exposure to a diversified blend of complementary investments so that we limit the extent to

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which single events impact your savings and investments.

Consequently, the overall exposure to underlying investments directly impacted by the recent social unrest was not significant.

The top-rated asset managers we have appointed across our portfolio solutions have a deep understanding of the companies they invest in and they are aware of any potential issues that may, in turn, materially affect the value of those companies that have been impacted by the riots. As stewards of your savings and investments, we will continue to proactively engage with the asset managers to assess their views as developments unfold and readily respond with your best interests in mind, where necessary.

We urge our clients to be patient, and although it might seem easier said than done, refrain from letting emotions win over sound investment reason. It is crucial that you maintain tunnel vision for your long-term investment goals and stay invested for the long term. We understand that our local community is still in a state of heightened anxiety and unsettling feelings about our future, but we want to assure you that your financial future is in safe hands.

ALEXANDER FORBES INVESTMENTS | CHIEF INVESTMENT OFFICER’S MESSAGE

SECTION 2 Market and economic outlook

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ALEXANDER FORBES INVESTMENTS | MARKET AND ECONOMIC OUTLOOK

Global growth outlook, supported by robust fiscal measures and vaccine drives

1

Uneven global economic recovery fuelled by the three-phase vaccine roll out

2

Global inflation expectations remain anchored but fears of sustained inflation remain

3

Insurgence speed bumps to South Africa’s economic recovery have long-term implications for investment

Isaah Mhlanga

4

South Africa’s labour market to lag economic recovery

5

Robust returns in Q2 2021, but high valuations imply lower returns going forward

Highlights

Chief Economist

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ALEXANDER FORBES INVESTMENTS | MARKET AND ECONOMIC OUTLOOK

Three-speed vaccine roll out risky for global economic recovery It has been over six months since the second wave of Covid-19 infections, and now new cases caused by the Delta Covid-19 variant are surging again across the world even in countries that have vaccinated a large portion of the adult population.

The misfortune is that while the current third wave in Covid-19 infections spreads globally, the economic recovery in regions such as Africa and some emerging market economies, which are yet to administer a sizeable number of vaccines – currently less than 10% of Africa’s adult population has received at least one dose – the recovery will lag even further behind and cause the disparities between wealthy and poor countries to widen further. More so, it is becoming greatly evident that further lockdown restrictions to curb the spread of the virus will result in severe economic strain as the current wave’s peaks surpass those of both the first and second waves in some countries. Advanced economies have secured and administered vaccines to approximately 70% of the adult population and strong economic recoveries are under way.

The risk for Africa is that the lack of fast and significant vaccination campaigns will result in recurring waves of infection and this is detrimental to not only the vulnerable lives in Africa but as we have seen, the global livelihoods will also remain at risk. More so, if left unchecked, the prolonged pandemic will diminish foreign investment, productivity and economic growth. Hence the calls for advanced economies to support those countries in need.

The International Monetary Fund (IMF) estimates that the global economy requires about 745 million vaccine doses to inoculate at least 60% of the world adult population. So far, about 250 million vaccine jabs have been made available and securing an adequate number of doses by the third quarter of 2021 remains a key risk.

To fast track the global vaccination drive, the IMF estimates that we would have vaccinated at least over a third of the total global population (60% required for herd immunity) by the end of 2021 with the remainder by Q2 2022. As it stands, the COVAX programme aims to provide Africa with some 30% vaccine doses and an additional 30% will come from the African Vaccine Acquisition Task Team (AVATT), established by the African Union.

Figure 1: Three-speed Covid-19 vaccination roll out

However, most African countries have limited fiscal space to finance the roll out of vaccines on the back of elevated debt levels and rising spending requirements. Therefore, global financing institutions are considering providing such financial assistance in the form of grants or concessional loans. The IMF has accelerated lending to Sub‑Saharan Africa by 13 times more than the annual average and will raise access limits to scale up the zero-interest lending facility. Combined with the efforts of the G20 governments’ $22 billion grant funding gap, as noted by the Access to Covid-19 Tools (ACT) accelerator programme and some emerging economies, the global recovery may just be sustained because, as widely stated, there can be no sustainable end to the economic crisis without an end to the health crisis. It is estimated that a faster end to the pandemic, resulting in a quicker economic activity rebound, could add an approximate $9 trillion into the global economy by 2025.

Figure 2: Required vaccine doses to reach global herd immunity

Number of vaccines in millions

Emerging markets and developing economies excluding Sub-Saharan Africa

Sub-Saharan Africa

Sources: Our world in data, IMF and Alexander Forbes Investments (Data as at 30 June 2021)

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ALEXANDER FORBES INVESTMENTS | MARKET AND ECONOMIC OUTLOOK

Global economic growth divergence

Figure 3: Global growth projections point to uneven recovery

The growing disparities in the roll out of vaccines across the world will unfortunately translate into an uneven economic recovery.

Despite the rise in Covid-19 variants around the world, prospects for the global economy have improved significantly with most advanced economies recovering at a much faster pace than in emerging market and developing economies. The post-pandemic growth trend will remain lower than the pre-Covid-19 potential growth levels, leaving low-income countries, particularly in SubSaharan Africa, with a protracted recovery.

Global output is set to rise by 6% in the current year, driven by a faster than expected growth of 5.1% in advanced economies and a 6.7% growth in emerging market and developing economies.

In 2022, the momentum in global growth will ease to 4.4%, with growth in developed economies, and emerging and developing economies moderating to 3.6% and 5% respectively. Growth in Sub-Saharan Africa is expected to be slower at 3.4% in 2021, driven by the slow pace of vaccine roll outs, before edging slightly higher at 4% in 2022. Real GDP in the United States (US) will accelerate by 6.4% in 2021, while growth in the Euro Area and the (united Kingdom (UK) will expand by 4.4% and 5.3% respectively, supported by fiscal policy measures and improved labour market indicators that are boosted by the gradual reopening of the economy and the accelerated pace of vaccinations. In 2022, output is projected to moderate to 3.5%, 3.8% and 5.1% in the US, the Euro Area and the UK, respectively.

Sources: IMF and Alexander Forbes Investments (Data as at 30 June 2021)

For emerging market and developing economies, such as China and India, real GDP growth will expand by 8.4% and 12.5% in the current year before moderating to 5.6% and 6.9% in 2022.

However, India’s output is greatly dependent on the management of Covid-19 outbreaks that increased uncontrollably in recent months due to the Delta variant as well as inadequate vaccination campaigns, like in many other emerging economies.

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The economic recovery will take less than three years to revert to pre-pandemic output levels for most advanced economies.

However, it will take some 3-7 years for the majority of emerging market and developing countries to recover GDP per capita, which poses significant risk of increased inequality.

ALEXANDER FORBES INVESTMENTS | MARKET AND ECONOMIC OUTLOOK

Rising inflation fears, the race to exit and the normalisation of monetary policy The recent spike in inflation in key countries was driven mainly by the surge in commodity prices, particularly international oil prices, along with pandemic-related low base effects. Growth in world inflation is expected to rise by an average of 3.7% in 2021 before easing to 3.1% in 2022. The inflation rate in advanced economies is projected at 1.9% in 2021 before moderating slightly to 1.7%. In the US, consumer inflation rose by a sharp 4.7% year-on-year (y/y) in Q2 2021, from 1.9% y/y in the previous quarter, significantly above the US Fed’s target of 2%, buoyed by mounting commodity prices, supply constraints, higher wages reflecting the ongoing economic recovery and the low base effect caused by Covid-19. The IMF forecasts US inflation at 2.3% and 2.4% in 2021 and 2022 respectively. Furthermore, the US Fed raised its inflation forecast for 2021 to 3.5%, from its previous 2.5%, with a moderation thereafter.

In the Euro Area, annual growth in the consumer inflation rate averaged 1.8% y/y in the second quarter of 2021, from an average of 1.0% y/y in Q1 2021, on the back of rising energy costs, services, non-energy industrial goods and food prices, but remaining below the European Central Bank’s (ECB) 2% policy target rate. For 2021, inflation is set to rise to 1.8% in 2021, before easing to 1.2% in 2022, driven by a surge in consumer prices mainly in Germany where inflation is projected to average 2.2% in 2021 and 1.1% in 2022. Meanwhile, second quarter consumer

Figure 4: Select advance economies, inflation rates

prices in the UK averaged 1.9% y/y, compared to 0.6% y/y in Q1 2021, and is expected to trend upwards in the near term with an estimated annual increase of 1.5% and 1.9% in 2021 and 2022 respectively.

Inflation in emerging market and developing economies is set to average 5.0% and 4.1% in 2021 and 2022 respectively.

China’s consumer inflation averaged 1.2% y/y in the second quarter, following a flat first quarter, amid a faster increase in the cost of non-food goods that were led by transportation and communication, clothing, rent, fuel and utilities. Second quarter inflation rates in Brazil, India and South Africa averaged 7.6%, 5.6% and 4.9% respectively, higher than the 5.3%, 4.9% and 3.1% recorded in Q1 2021 on the back of Covid-19-related low base effects and higher international oil prices. Consumers in emerging markets, particularly in the Middle East where there is a high dependency on food imports, are likely to experience much higher increases in prices. More so, the pass-through tends to be larger for emerging markets especially for food prices.

Figure 5: Select emerging and developing economies, inflation rates

The possible correction in commodity prices and the stabilisation or increase in the US dollar in the near term will put a cap on the inflation on the US and other countries, which somewhat supports the view that the current rise in inflation is transitory.

Sources: IMF and Alexander Forbes Investments (Data as at 30 June 2021)

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ALEXANDER FORBES INVESTMENTS | MARKET AND ECONOMIC OUTLOOK

Figure 6: Global inflation expectations

March 2022. The ECB expects net purchases via the PEPP over the coming quarter to be conducted at a significantly higher pace than during the first half of the year.

Following a similar stance of its peers, the Bank of England (BoE) kept interest rates unchanged at 0.1% and announced a slowdown in the pace of purchases of government bonds to £3.4 billion per week from £4.4 billion previously, signalling it is on course to end emergency support later this year. Notably, the BoE does not intend to tighten monetary policy, at least until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably.

Sources: IMF and Alexander Forbes Investments (Data as at 30 June 2021)

Monetary policy remains accommodative but gearing for normalisation Most major central banks have kept interest rates unchanged, pledging to maintain rates at their current low levels for a considerable time, and have continued with their bond purchase programmes. The US Fed left both the policy rate and the bond purchase programme unchanged at between 0%-0.25%, and US$120 billion per month, however, it shifted its messaging and tone. We interpret this as preparing the market for the official discussion of when it will be ideal to reduce the bond purchasing programme, either at the July or September 2021 meeting. The US Fed now projects an earlier policy rates increase in 2023, from a previous projection of 2024. We would expect the US Fed to scale back and finally end its bond purchasing programme first before starting interest rate increases.

This implies that the bond purchasing programme will likely be reduced through the course of 2022 in magnitudes of US$10 billion per month or US$30 billion every quarter from January through December 2022. This puts the likely announcement of tapering by the end of September this year, with an implementation date of January 2022.

The ECB left its monetary policy unchanged at 0% for 2021 and 2022, or until the inflation outlook robustly converges to 2% within the projection horizon. The ECB remains committed to take decisive action to maintain favourable financing conditions for households and corporate borrowers utilising the Pandemic Emergency Purchase Programme (PEPP) envelope at least until

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The pandemic vulnerability will remain if global herd immunity is not achieved, and the risk of the emergence of new Covid-19 variants remains high. More so, the current third and looming fourth waves of Covid-19 pose serious concerns for the outlook.

As infections continue to rise, further restrictions and lockdowns will weigh heavily on confidence as businesses and households grapple with economic stops-and-starts. Therefore, governments will be required to expand their investment in infrastructure and institute structural economic reforms rather than hold back on stimulus funding until the global recovery takes shape, to fasttrack productivity and propel growth in employment.

With these risks still looming, global central banks appear to be gearing for reversing the emergence monetary policy instituted in response to the Covid-19 pandemic. There is a gradual acceptance that the economic recovery so far no longer justifies large bond buying programmes and that interest rates will need to normalise, especially as inflation rates surprise on the upside.

For now, the assumption is that monetary policy will normalise without upending financial markets because economic growth fundamentals are conducive.

ALEXANDER FORBES INVESTMENTS | MARKET AND ECONOMIC OUTLOOK

South Africa outlook – the third Covid-19 wave, slow vaccination drive and insurgence risks to economic recovery Economic recovery is under way, but the Delta variant and the insurgence will hinder momentum A third wave of Covid-19 infections is currently throttling the South African economy and authorities moved the country to an adjusted lockdown “level 3, at the time of writing this note”.

The total number of positive coronavirus cases surpassed 1.97 million at the end of June 2021, with the death toll rising above 60 000. The vaccination drive is progressing slowly, with just over 4 million doses administered to frontline workers and those aged 60 years and above, compared to government’s target to inoculate some 40 million South Africans. The lockdown was arguably necessary to curb the rapid spread of the dominant Delta variant, however, these efforts have been dealt a big blow by the recent insurgents that created super spreader conditions, and destroyed billions in stock and infrastructure. However, this has damning effects on the services sectors and other nonessential sectors such as the alcohol industry and restaurants.

Prior to the Delta variant outbreak, the domestic economic recovery exceeded expectations, with Q1 2021 GDP growth coming at 4.6% quarter on quarter (q/q) seasonally adjusted and annualised (saar), from a revised 5.8% growth in Q4 2021.

Figure 7: Real GDP growth in Q1 2021

Much of the growth was driven by output growth in the primary sector, which increased sharply by 11.9% q/q saar in Q1 2021, from 0.5% q/q saar in Q4 2020, mainly driven by the 18.1% q/q saar growth in mining production. Growth in the secondary sector was softer at 1% q/q saar, compared to the acceleration of 16.9% q/q saar in the previous quarter, as the growth in manufacturing (1.6%) and construction (0.8%) was outweighed by the contraction of 2.6% in the utilities sector. The tertiary sector recorded a growth of 4.6% q/q saar in Q1 2021, adding positively to the total growth figure. Meanwhile, the annual contraction in real GDP eased to -3.2% in Q1 2021, from -4.2% in Q4 2020.

Given the recent performance in economic activity, we still expect real GDP to average 3.7%, with the better than expected first quarter GDP growth implying that the starting point is now much higher than initially anticipated. Robust commodity prices continue to help the economic recovery through improved terms of trade. Agriculture has also expanded on the back of more rain and an increase in the areas that have been planted.

Figure 8: Contributions to real GDP in Q1 2021

Sources: Stats SA and Alexander Forbes Investments

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ALEXANDER FORBES INVESTMENTS | MARKET AND ECONOMIC OUTLOOK

Figure 9: Growth in real gross fixed capital formation

Pre-Covid-19

Figure 10: Business confidence and purchasing managers’ index

On investments, real gross fixed capital formation (GFCF) contracted by 2.6% q/q saar in Q1 2021, after increasing by 12.1% q/q saar in the fourth quarter of 2020, driven by notable declines in machinery, transport equipment and residential buildings which decreased by 10.1%, 4.2% and 1.7% respectively, collectively shedding 4.4 percentage points from total investment. Real GFCF from the public sector increased at a slower pace of 12.6% in Q1, from 27.9% in the previous quarter. The continued increase is reflective of the rise in capital expenditure by the electricity sub-sector on non-residential buildings and the acquisition of transport equipment. Growth in real capital expenditure by general government accelerated further to 14.2% in the first quarter of 2021, from an increase of 12.0% in the fourth quarter of 2020, driven by the growth in the central and provincial government. For private business enterprises, real GFCF decreased by 8.9% in Q1 2021, after increasing by 5.8% in Q4 2020, as investments in machinery and other equipment, as well as in transport equipment, contracted markedly. As such, investment levels remain well below prepandemic record highs.

The Bureau for Economic Research (BER) manufacturing purchasing managers’ index (PMI) declined slightly to 57.4 index points in June 2021, from 57.8 in the previous month, and it remains in positive territory. This signals continued growth in the

Sources: BER, Stats SA and Alexander Forbes Investments

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manufacturing sector. The overall outlook remains uncertain as expectations for business conditions in the next six months will decline due to concerns around the current third wave of Covid-19 infections. Notably, the shortage of raw materials, increasing cost pressures and heightened electricity shortages, will greatly hinder activity. Meanwhile, business confidence improved significantly by 15 points in the second quarter of 2021, to the neutral mark of 50.

While confidence rebounded significantly in key sectors such as manufacturing and trade, investment growth remains subdued.

The economic recovery will face some headwinds going forward, on the back of the ongoing power shortages which have escalated amid increasing demand for electricity and a constrained grid. This, together with the persistent policy uncertainty, will continue to weigh on business confidence and investment growth which is critical for the recovery. More recently, the riots across KwaZulu-Natal and parts of Gauteng, which are estimated to have cost the economy an estimated R20 billion, will have both a short-term and long-term economic impact. Business confidence will likely decrease in the quarters ahead as this would have reversed the boost in confidence from recent reform efforts. It is still too early to have a realistic picture of how this will impact on investment, but the dent will surely be felt long after the conditions normalise.

ALEXANDER FORBES INVESTMENTS | MARKET AND ECONOMIC OUTLOOK

Heightened unemployment levels to persist over the medium term First quarter 2021 employment statistics highlighted a weakness in the South African labour market, meaning that the recovery for consumer facing sectors is likely to lag the current economic recovery. The Quarterly Labour Force Survey (QLFS – a householdbased survey) reported that the official unemployment rate increased to a new all-time high of 32.6% in Q1 2021, from a previous high of 32.5% in Q4 2020, while the expanded unemployment rate rose marginally to 43.2% in Q1 2021, from 42.6% in Q4 2020. The number of employed people decreased by 28 000, remaining around 15 million, after increasing by 333 000 in Q4 2020, from 14.7 million in Q3 2020. This represents a 0.2% q/q decline and an 8.5% y/y contraction in employment. Meanwhile, the latest Quarterly Employment Statistics (QES – an enterprisebased survey), indicated that total employment declined by 9 000 in Q1 2021, while the annual outcome showed a decline of about 552 000 jobs compared with the same quarter last year. Full-time employment declined by 63 000, after declining by 11 000 in the previous quarter, suggesting that the private sector remains vulnerable. Both surveys showed a continued weakness in the construction, transport and trade sectors, while employment growth in manufacturing remains marginal.

The unprecedented coronavirus shock to the economic output has resulted in an uneven impact across sectors due to the phased easing of lockdown measures. There is weaker recovery in employment relative to the recovery in economic activity since the deep contraction in output in Q2 2020. Of the 2.2 million jobs lost last year, about 1.4 million jobs are yet to be recovered, which

Figure 11: Total formal non-agricultural employment recovery*

also suggests that it will be several quarters before employment levels revert to the peak employment level of 16.5 million recorded in December 2018. Figure 11 compares the formal labour market’s recovery from the Global Financial Crisis (GFC) of 2008/09 to that of the current Covid-19 pandemic. Overall, formal employment, as measured by the QLFS, shows that it took about four quarters before the crisis caused significant damage to the job market and a further nine quarters to restore the job losses. For the manufacturing sector, after the initial GFC shock which found the sector already vulnerable on ongoing power shortages and a weak investment environment, the sector reverted to pre-crisis after 30 months; at face value. This suggests that with the current stop-and-start in economic activity due to rising Covid-19 infections, it will take a long time for the sector to recover the jobs shed over the course of 2020.

Over the medium term, our view is that the labour market will remain subdued and the unemployment rate will continue to rise as employment growth remains muted, while the labour force also continues to rise. However, in the near term, we expect that more people will return to the labour force, although it’s unclear whether they will be returning to their previous jobs, provided more South Africans receive vaccinations and the lockdown measures continue to be lifted. We project an improvement in employment in the finance, government, construction and trade sectors. Notably, slow economic growth will continue to constrain domestic demand and thereby put pressure on employment growth.

Figure 12: Recovery in total formal non-agricultural earnings**

Sources: Stats SA and Alexander Forbes Investments *Quarterly Labour Force Survey measurements **Quarterly Employment Statistics measurements

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ALEXANDER FORBES INVESTMENTS | MARKET AND ECONOMIC OUTLOOK

Figure 13: Unemployment rate projections

Inflation to remain below the mid-point target over the medium term

Figure 15: Inflation has surged in recent months

While the headline consumer inflation rate edged higher in May 2021, driven by elevated fuel prices rising above the South African Reserve Bank’s (SARB) 4.5% mid-point target at 5.2% y/y for the first time since November 2018, the year-to-date average inflation remains at 3.8%, suggesting that inflation remains well contained. Meanwhile, producer price inflation (PPI) surged to the highest level since July 2016 at 7.4% y/y in May 2021, on elevated commodity prices and higher electricity costs, while the year-to-date PPI averaged 5.4%.

Figure 14: Expected job creation by sector

The overall risk to the inflation outlook is broadly balanced, despite the upward pressure and elevated global inflation expectations. The SARB left the repo rate unchanged at 3.5%, signalling an end to the rate-cutting cycle. We believe that headline inflation will hover near the 4.5% mid-point target range over the next three years, but average 4.0% in 2021 and 4.1% in 2022. Core inflation is projected to rise to 4.3% towards the end of the forecast horizon, while the rate of the reversion towards the midpoint will be tempered by the gradual closure of the negative output gap.

Figure 16: Inflation expectations remain well anchored

The continued weakness in the domestic economy and labour markets, risks to commodity prices and the somewhat resilient local currency are supportive of a decision to keep monetary policy unchanged at least until the second half of 2022. Risks for an earlier hike, which is not what we expected, come from the possibility that the US Fed will start to unwind its quantitative easing (QE) sooner than expected.

Sources: Stats SA and Alexander Forbes Investments

Sources: Stats SA, BER, SARB and Alexander Forbes Investments

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ALEXANDER FORBES INVESTMENTS | MARKET AND ECONOMIC OUTLOOK

Another record trade surplus for South Africa, driven by elevated commodity prices South Africa recorded a new record high trade surplus in May 2021 at R54.6 billion, with the cumulative year-to-date trade surplus increasing by R10.6 billion to R202.6 billion compared to the same period last year. The rise in exports is reflective of the continued recovery in global economic activity. Over the near term, commodity prices are expected to remain favourable before moderating over the medium term. As the global and local economy gradually reopens, higher international oil prices and improved domestic demand will likely result in increased import demand, which will reduce the trade surplus. The balance on the current account of the balance of payments widened significantly in Q1 2021, increasing by a sizeable R267 billion from R198 billion in the previous quarter, translating into a growth of 5% of GDP from 3.7% of GDP.

Figure 17: Trade surplus held firm

180 000

62 000

160 000

42 000

140 000 120 000

22 000

100 000

2 000

80 000 60 000

-18 000

40 000

-38 000

20 000

-58 000

Figure 18: Balance on current account R’ billion

Sources: Stats SA, SARB and Alexander Forbes Investments

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ALEXANDER FORBES INVESTMENTS | MARKET AND ECONOMIC OUTLOOK

Outlook Table 1: Revision of economic forecasts FY 20 Baseline macro forecast

FY 21

FY 22

Actual

FY 23

Budget 1st and 2nd

3rd and 4th

FY 25

FY 26

Plan

Covid-19 assumptions Waves

FY 24

Global herd immunity

Real economic activity Real economic growth (%)

0.1

-7.6

3.7

2.0

1.8

1.8

1.8

Nominal economic growth (%)

4.6

-4.4

8.8

5.9

5.8

5.8

5.8

3.9

4.0

4.1

4.4

4.5

4.5

4.5

Liquidation and solvencies Prices and wages Headline CPI Inflation (%) Labour markets SA population (millions)

59.0

59.9

59.9

59.9

59.9

59.9

59.9

Labour force (thousands)

23 452

23 898

24 352

24 815

25 285

25 766

26 256

Employment (thousands)

16 383

15 632

15 429

15 656

15 867

16 082

16 301

30.1

34.6

36.5

36.9

37.2

37.6

37.9

Repro rate (%)

5.25

3.50

3.75

4.00

4.50

6.00

7.00

Prime rate (%)

8.75

7.00

7.25

7.50

8.00

9.50

10.50

Unemployment (%) Markets assumptions

Source: Alexander Forbes Investments (Data at 30 June 2021)

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ALEXANDER FORBES INVESTMENTS | MARKET AND ECONOMIC OUTLOOK

Global financial markets rally in Q2 2021 with equities posting a fifth straight quarterly gain The second quarter of 2021 was good for the global financial markets, with equities marking the fifth straight quarterly gain, the longest streak in the past three years. The outcome was buoyed by a rising global growth optimism on the growing vaccination drives, mainly in developed countries, a dovish tone by major central banks and accommodative fiscal policies which saw market volatility decreasing to record lows. However, discussions around potential US Fed tapering kept emerging markets (EM) under pressure later in the quarter. Meanwhile high Covid-19 cases continue to restrict the recovery in most parts of the major EM countries. Notably, US President Joe Biden’s

$1.2 trillion infrastructure plan spurred risk appetite among investors. The MSCI All-Country World Index (MSCI ACWI) returned 7.5% in Q2 2021, from 4.7% in Q1 2021, in US dollars.

quicker normalisation of monetary policy by major central banks due to heightened inflationary pressures and surging coronavirus cases in EM countries.

Regionally, the MSCI Developed Markets Index (MSCI DM) returned 7.9% in Q2 2021, from 5.1% in the first quarter of the year in US dollars, buoyed by the strong performance in the US, Europe and the UK. MSCI Emerging Markets Index (MSCI EM) returned positive returns of 5.1% in Q2 2021, from 2.2% in Q1 2021 in US dollars, buoyed by a strong performance in Brazil, Mexico and India.

The EM underperformance was driven by concerns around

Global bonds underperformed global equities as investors favoured risky assets in the quarter, with the FTSE World Government Bond Index (WGBI) returning a positive 1.0% in Q2 2021, from -5.7% in Q1 2021, in US dollars. EM bonds outperformed global bonds, with the JP Morgan Emerging Market Bond Index returning a positive return of 3.5% in Q2 2021, from -6.6% in Q1 2021, in US dollars.

South African stocks underperformed late in the first quarter as commodities retreated South African (SA) equities performance moderated significantly in Q2 2021 with the ALSI returning 0.05%, from 13.15% in the first quarter of the year, as resources weakened in the last month of the quarter, recording the first negative monthly return since October 2020. The market was also impacted by the spread of the Delta coronavirus variant that has overwhelmed hospital capacity and which led to new stringent lockdowns.

From a sector perspective, the local equities were supported by financials and industrials which returned 7.9% and 0.8% in Q2 2021, respectively, in rands, while resources weakened by 5.0% in Q2 2021, in rands.

SA property outperformed local equities, buoyed by hopes of economic normalisation as the vaccination campaign kicked off. Furthermore, the number of funds have outlined initiatives

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taken to improve liquidity and support tenants. Local property returned a positive return of 12.1% in Q2 2021, from 6.4% in Q1 2021, in rands.

Local bonds outperformed local equities, with the local bond index returning 6.9% in Q2 2021, from -1.7% in Q1 2021 in rands, lifted by attractive risk compensation. Local cash returned 0.9% in Q2 2021 in rands.

ALEXANDER FORBES INVESTMENTS | MARKET AND ECONOMIC OUTLOOK

Commodities rallied on hopes for a potential stimulus-driven global economic recovery Brent crude oil was the biggest gainer in the second quarter, increasing by 18.2%, from 22.7% in the previous quarter, and reaching $75 per barrel, the highest level since 2018. This was supported by growing global demand as the US domestic air travel continues to strengthen. Oil prices have also been supported by delays from the US-Iran negotiations, and weaker output from Saudi Arabia and Russia. Oil production is lower by 20% and 10% from pre-pandemic levels in Saudi Arabia and Russia, respectively. Iron ore, copper and silver increased by 17.6%, 7.5% and 7.0% in Q2 2021, respectively. Gold increased by 3.7%, driven by inflationary concerns.

Major currencies performed well against the US dollar, mainly reflecting a weaker US dollar, with the dollar index (DXY) falling by 0.9% in Q2 2021. The euro appreciated by 1.1% in Q2 2021 on robust vaccination roll outs in the region, while the British pound appreciated by 0.35% against the US dollar in Q2 2021. The SA rand appreciated by 3.3% against the US dollar in Q2 2021.

Figure 19: Global asset class performance – Q2 2021 (in US dollars)

Figure 20: SA asset class performance – Q2 2021 (in rands)

Hang Seng

Sources: Bloomberg and Alexander Forbes Investments (Data at 30 June 2021)

Figure 21: Commodities performance – Q2 2021

Sources: Bloomberg and Alexander Forbes Investments (Data at 30 June 2021)

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Sources: Bloomberg and Alexander Forbes Investments (Data at 30 June 2021)

ALEXANDER FORBES INVESTMENTS | MARKET AND ECONOMIC OUTLOOK

Figure 22: Developed markets FX – Q2 2021

Figure 23: Emerging markets FX – Q2 2021

Sources: Bloomberg and Alexander Forbes Investments (Data at 30 June 2021)

Sources: Bloomberg and Alexander Forbes Investments (Data at 30 June 2021)

Figure 24: Saudi Arabia and Russia’s oil production remains subdued

Figure 25: China and India’s demand for fossil fuels remains strong

Sources: Bloomberg and Alexander Forbes Investments (Data at 30 June 2021)

Sources: Bloomberg and Alexander Forbes Investments (Data at 30 June 2021)

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ALEXANDER FORBES INVESTMENTS | MARKET AND ECONOMIC OUTLOOK

Table 2: Asset class performance (%) June-2021

Q2 2021

Q1 2021

YTD

1 year

MSCI DM Index

Global asset classes in USD

1.5

7.9

5.1

13.3

39.7

MSCI ACWI Index

1.3

7.5

4.7

12.5

39.9

MSCI EM Index

0.2

5.1

2.2

7.4

41.3

MSCI EFM EX SA Index

0.6

6.7

-1.5

5.0

25.4

FTSE WGBI

-1.1

1.0

-5.7

-4.8

0.8

JP Morgan EM Bonds

-1.1

3.5

-6.6

-3.3

7.3

MSCI UK

-2.4

6.0

6.2

12.5

31.3

SA asset classes in ZAR

June-2021

Q2 2021

Q1 2021

YTD

1 year

ALSI

-2.4

0.0

13.2

13.2

25.1

TOP40

-2.6

-0.8

13.2

12.3

23.1

SWIX

-2.8

-1.8

13.3

11.2

21.8

Capped SWIX

-3.0

0.6

12.6

13.3

27.6

Resources

-6.4

-5.0

18.8

12.9

29.6

Financials

-2.1

7.9

3.8

12.0

31.7

Industrials

0.4

0.8

12.9

13.8

19.5

ALBI

1.1

6.9

-1.7

5.0

13.7

Property

3.4

12.1

6.4

19.2

25.1

Cash

0.3

0.9

0.9

1.7

3.5 1 year

Commodities performance

June-2021

Q2 2021

Q1 2021

YTD

Gold

-7.2

3.7

-10.0

-6.8

-0.6

Oil price

8.4

18.2

22.7

45.0

82.6

Platinum

-9.6

-9.4

10.8

0.3

29.7

Copper

-8.1

7.5

13.5

22.1

58.3

Silver

-6.8

7.0

-7.5

-1.0

43.5

Iron ore

16.8

17.6

8.8

28.0

75.1

Currencies

June-2021

Q2 2021

Q1 2021

YTD

1 year

Rand/Dollar

4.0

-3.3

0.6

-2.8

-17.7

Rand/Euro

0.9

-2.3

-3.5

-5.6

-13.1

Rand/Pound

1.2

-3.0

1.4

-1.7

-8.2

Sources: Bloomberg and Alexander Forbes Investments (Data at 30 June 2021)

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ALEXANDER FORBES INVESTMENTS | MARKET AND ECONOMIC OUTLOOK

Asset allocation themes – Q2 2021 We maintain our view which supports equities with good pockets of value, but peak growth and earnings mean slight moderation over the next 12 months. Equity markets continue to be driven by vaccination roll-out progress and growth expectations across the globe, with developed markets’ equities outperforming emerging markets’ equities. This is a reflection of the difference in vaccination progress and growth expectations.

Due to base effects, the past 12 months have delivered one of the strongest one-year returns ever, with global, EM and small caps outperforming while defensive equities lagged. Given our view that peak growth and therefore peak earnings is behind us, we believe the past year’s returns will not be repeated.

Value stocks (proxied by small caps) and value managers’ performance has turned which are now outperforming the rest of the market, and will likely continue to outperform other styles. Emerging market equities should continue to perform well driven by attractive valuations, but the talk of monetary policy normalisation in the US poses a risk for a moderation; we believe we are not there yet.

Market volatility is on the rise as sentiment around inflation, interest rates normalisation, and peak growth takes centre stage. While the US Fed has kept its monetary policy unchanged, with the Fed Funds rate at between 0% and 0.25%, and bond purchases of US$120bn per month, it has upwardly revised its economic projections. Growth is now expected to top 7.0% in 2021 and inflation is expected to rise to 3.5% before moderating in 2021. This change in growth and inflation forecasts, and the recent surge in inflation to over 5.0% in the US has sparked fears that inflation might be sustained, and the Fed will be forced to start talking about scaling back its bond purchasing programme and ultimately hiking interest rates in 2023, which is a year earlier than its initial guidance.

In the fixed income space, SA bonds are paying off, as longdated bonds started to outperform after struggling in 2020, helped by resolute fiscal consolidation efforts and expected economic recovery. The peak economic growth and peak earnings macro theme combined with expectations of normalising global interest rates and the potential moderation in equity returns

have made bonds more attractive in the second quarter of the year, following negative returns in the first quarter. Inflation has peaked and will moderate in the near term, which implies that nominal bonds are still favourable to inflation-linked bonds.

Commodity prices remain well supported over the medium term, driven by infrastructure spend, but the peak performance seems to be behind us. We expect the normalisation of China’s economic growth to drive the moderation in commodity prices over the next 12 months. More so, the rotation from goods consumption to services consumption as the major driver of US growth reinforces a moderation in commodity prices.

Consequently, we see a rotation from resources to financials and industrials over the next 12 months.

As volatility rises, active management will continue to add value well across portfolios on the face of shifting market dynamics. Multi-managed portfolios continue to offer all sources of returns and risk management features that have been the cornerstone of how we manage portfolios.

Asset class views Asset classes

Q3 2021

Commentary

Rand DM equity (USD) EM equity (USD) DM bonds (USD) EM bonds (USD) US cash (USD) Local equity Local bonds Local ILBs Local property Local cash Local cash

Neutral/unattractive Neutral/attractive Neutral/attractive Neutral/unattractive Neutral/attractive Unattractive/neutral Neutral/attractive Neutral/attractive Neutral/unattractive Neutral/unattractive Neutral/unattractive Neutral/unattractive

Early US Fed tapering and slowdown in the US and China will negatively weigh on EM currencies Fading fiscal and slowdown in global growth will impact equities As global growth weakens investors may run to safe-haven assets Early US Fed tapering and slowdown in the US and China will negatively weigh on EM currencies US cash is offering negative real yields Early tapering and slowdown in the US and China will negatively weigh on local equities Local bonds still offering positive real yield relative its counterparts Inflation indicators show that inflation has peaked and lower inflation rates make ILBs unattractive Property will be negatively impacted by surging coronavirus cases and lockdown restrictions Cash is offering negative real yields Cash is offering negative real yields | 22 |

ALEXANDER FORBES INVESTMENTS | MARKET AND ECONOMIC OUTLOOK

SECTION 3 Our investment approach

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Multi-management.

Our DNA, your investment building blocks.

Since our inception 24 years ago, Alexander Forbes Investments has always been centered on risk-led, multi-managed portfolio solutions. It is who we are and it is what we do – for you.

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ALEXANDER FORBES INVESTMENTS | OUR INVESTMENT APPROACH

We know the demands investing has on you: how much time it takes; the need to have a constant handle on complex and

Multi-management is an investment approach that allows the

ever-changing investment options and governance considerations; and the need to have resilient, protected investment

multi-manager to select and combine many single-asset managers,

solutions to ride out increasingly volatile and unpredictable markets. We also know that not many investors are built for that.

across different asset classes and styles of money management, into one portfolio. Our multi-managed solutions were built, and

It is, however, what our multi-managed solutions were built for.

are closely managed, by specialist teams with in-depth investment

We tap into our extensive manager research network to bring top-rated asset managers and investment ideas together, balancing their strengths across all market conditions.

knowledge and insight. They ensure our portfolio solutions work hard for you, giving you a greater opportunity to achieve your investment goals, no matter what the markets do.

Through our strategic relationship with Mercer, we offer organisational scale, giving you global access to a broad range of traditional and alternative investment opportunities others can’t provide.

Our four-pillar framework for responsible investment has accelerated long-term ESG risk and return considerations in our solutions.

We are leaders in multi-management, because multi-management is how we were built. And it’s how we do our bit to help you achieve financial well-being.

We keep a constant handle on complexity and choice as we strive to make your investment experience simpler, smoother and safer.

Our aggregate buying power means we can give you greater investment diversity at competitive management fees.

We’ve set out a path for better, more sustainable investment results to help your investments transition and thrive, now and in the future.

Multi-management.

Our DNA, your investment building blocks.

To find out more about how our multi-management approach has helped make investing simpler, smoother and safer, click here.

Smoother multi-manager performance

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SECTION 4 Useful links

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ALEXANDER FORBES INVESTMENTS | USEFUL LINKS

Useful links Click here to read Q1 2021 Investment report

Alexander Forbes Group FY 2021 annual results for the year ended 31 March 2021

Improving outcomes for retirement fund members in a post COVID-19 world

John Anderson Executive: Investments, Product and Enablement – AF Group

John spoke of how a shift to an integrated approach could provide higher returns at lower risk whilst providing an impact and doing good. Read more on his thoughts here.

Multi-management: Taking the hassle out of investing

Riccardo Fontanella Head: Technical Marketing – AF Investments

Dawie de Villiers Chief Executive Officer – Alexander Forbes Group

Riccardo shared thoughts on how multi-managed portfolio solutions can help fiduciaries delegate day-to-day investment decisions to industry experts who monitor investments in real time and take decisions on time. Read more of his insights here.

Bruce Bydawell Chief Financial Officer – Alexander Forbes Group

The Alexander Forbes Group released its annual results for the 2021 financial year on Monday the 14th of June 2021.

The Bulls and Bears of Investing

Our group Chief Executive Officer and Chief Financial Officer presented these results to business, analysts and various stakeholders. The diverse media coverage received following the presentation can be found here.

Yuvern gives a refresher on the common terms used to describe the varying cycles that can be experienced in the world of investing. He also gives emphasizes the importance of staying focused on the financial goal, despite changing cycles. For more on this, click here.

Yuvern Dokie Senior Technical Investment Specialist – AF Investments

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ALEXANDER FORBES INVESTMENTS | DISCLAIMER

Disclaimer Alexander Forbes Investments Limited is a licensed financial services provider, in terms of section 8 of the Financial Advisory and Intermediary Services Act 37 of 2002, as amended, FAIS licence number 711.

This information is not advice, as defined and contemplated in the Financial Advisory and Intermediary Services Act 37 of 2002, as amended.

Please be advised that there may be supervised representatives.

Company registration number: 1997/000595/06 Pension Fund Administrator number: 24/217 Insurer number: 10/10/1/155

The value of a portfolio can go down, as well as up, as a result of changes in the value of the underlying investments, or of currency movement. An investor may not recoup the full amount invested.

Postal address: PO Box 786055, Sandton 2146 Physical address: 115 West Street, Sandown 2196

All policies issued or underwritten by Alexander Forbes Investments are linked policies, under which no guarantees are issued. The policy benefits are determined solely on the value of the assets, or categories of assets, to which the policies are linked.

Telephone number: +27 (0) 11 505 6000 The complaints handling procedure and conflict of interest management policy can be found on the Alexander Forbes Investments website: www.alexanderforbesinvestments.co.za.

Past performance is not necessarily an indication of future performance. Forecasts and examples are for illustrative purposes only and are not guaranteed to occur. Any projections contained in the information are estimates only and are not guaranteed to occur. Such projections are subject to market influences and contingent upon matters outside the control of Alexander Forbes Investments, so may not be realised in the future.

Designed by Alexander Forbes Communications. Photos: Gallo Images. | 28 |

22215-Institutional Investment Report-Q22021