The Absa Inflation Beater Fund has returned 8.8% p.a. for the 3 years to 30 September 2014, comfortably ahead of CPI over this period of 5.9% p.a. The Fund returned 8.0% over the past 12 months and 8.3% p.a. over the past 5 years, which is 3% above CPI for the 5 year period. The Monetary Policy Committee of the South African Reserve Bank (SARB) increased interest rates by 0.25% during the quarter in response to a deteriorating outlook for inflation. The recent weakening in the Rand, the likelihood of above-inflation labour settlements in coming years, along with high administered price increases may place pressure on local inflation going forward.
Although the Rand weakened dramatically against the dollar during the third quarter of 2014, it was more stable against the euro and the pound. As we have previously pointed out, history has shown that the Rand can both strengthen beyond consensus expectations, and also sell off strongly in a short space of time, particularly when sentiment of foreign investors towards South African financial assets turns negative.
Over the past number of years, worldwide governments and central banks have created a generally positive backdrop for risky assets by means of accommodative monetary policy. In recent months, the economic recovery in the Developed World has been somewhat uneven. Given that global inflation remains at tolerable levels, it appears unlikely that global central banks will hike interest rates aggressively in the near term. Commodity prices have corrected downwards sharply, which has led to the negative performance of resource shares. Chinese GDP growth has also decelerated recently, and along with labour issues surrounding South African mines, this has put something of a cloud over mining shares. Basic Materials continued to struggle, with gold mining losing 12.4% and platinum mining 19.4%.
In terms of equity exposures, we continue to focus on companies that are trading at parity (or at a discount) with the market at large, yet have higher earnings and dividend yields, strong business franchises and balance sheets, and better visibility of cash flow. The Absa Inflation Beater Fund continues to be positioned with the objective of minimizing the risk of capital loss, whilst targeting a return in excess of inflation.

The Absa Inflation Beater Fund has returned 8.6% p.a. for the 5 years to 31 March 2014, comfortably ahead of CPI over this period of 5.4% p.a. The Fund has also returned 8.4% p.a. over the past year, which is 1.8 % above CPI for the period.

The All Bond Index returned 2.5% for the quarter, and cash (as measured by the 3 month NCD rate) earned 1.4%. The FTSE/JSE All Share Index continued to strengthen during the 2nd quarter of 2014, returning 7.2% and hitting a new all-time high of 51 322 on 20 June 2014. The strong performance of the stock market contrasts with the dismal performance of the South African economy. GDP growth in SA for the first quarter of 2014 was a negative 0.6 % (quarter on quarter, seasonally adjusted), with Mining down 24.7% and Manufacturing down 4.4%. The second quarter should show some small improvement from this low base, notwithstanding strikes in major sectors. However the South African Reserve Bank has made further cuts to its growth forecasts, now at 1.7% for 2014 (from 2.1%) and 2.9% for 2015 (from 3.1%).

This pattern of strong equity markets and weak economic news was not unique to South Africa. The S&P 500 Index in the USA rose by 4.7%, notwithstanding USA GDP being revised down sharply from an initial estimate of +0.1% to -2.9% for the first quarter. Bad weather, which disrupted production, construction and shipments, was partly to blame. There is an expectation of a much better 2nd quarter, though this also has been revised down from earlier more optimistic estimates. What has boosted the US stock market has been the unexpected fall in USA bond rates. The US 10 year government bond rate fell from 3.03% at 31 December 2013 to 2.49% at 30 June 2014. Consensus forecasts earlier this year were for the US 10 year government bond rate to rise to above 3.50% in 2014.

In addition to disappointing economic figures, global political tension has risen, with military skirmishes in Ukraine, Syria and Iraq. Stock markets have generally ignored the increase in political tension, with risk, as measured by the USA VIX index, reaching a 7 year low of 10.6 on 18 June 2014.

The South African equity market is fairly expensive, both compared to its own history and other emerging markets. Therefore there must be some risk of a market correction. As long-term investors, we constantly remind ourselves neither to become too flustered nor too excited by short-term fluctuations in share prices. We continue to focus on stocks that are trading at parity (or at a discount) with the market at large, yet have higher earnings and dividend yields, strong business franchises and balance sheets, and better visibility of cash flows, and we continue to keep our equity exposures to companies where we are comfortable with future earnings prospects.

The Absa Inflation Beater Fund continues to be positioned so as to minimize the risk of capital loss, whilst targeting a return in excess of inflation.

The Absa Inflation Beater Fund has returned 8.1% p.a. for the 3 years to 31 December 2013, comfortably ahead of CPI over this pe-riod of 5.7% p.a. The Fund has also returned 8.4% p.a. over the past 5 years, which is 3.3% above CPI for the 5 year period. For the year the Fund earned a slightly disappointing 4.0%, with the main drag on performance being the low yields available on the cash component as well as below average returns on inflation linked bonds.

In aggregate the Monetary Policy Committee of the South African Reserve Bank (SARB) has cut interest rates by 700 basis points since their peak. Local inflation has been running at 5.3% over the past year, which means it is now below the upper limit of the South African Reserve Bank's target range. The recent weakening in the Rand, the likelihood of above-inflation labour settlements in coming years, along with high administered price increases may place pressure on local inflation going forward.

Largely due to fears about the twin current account and fiscal budget deficits in South Africa, but also following concerns about the effects of Quantitative Easing on emerging market currencies, the Rand weakened further in the 4th quarter of 2013. The local cur-rency moved from 10.03 against the dollar to 10.35, from 16.24 to 17.35 against the pound, and from 13.55 to 14.42 against the euro. As we have previously pointed out, history has shown that the Rand can both strengthen beyond consensus expectations, and also sell off strongly in a short space of time.

Over the past number of years, worldwide governments and central banks have created a generally positive backdrop for risky assets by means of accommodative monetary policy. This stimulation has come at a price, however - ratings agencies have previously down-graded sovereign debt of both the US and various European countries, and the debt ceiling for the US will once again have to be in-creased in the near future. In 2013, longer term interest rates around the world rose, albeit from artificially low levels.

The global economic recovery is progressively taking root at a "main street" level. However, the USA Federal Reserve Bank has to maintain a delicate balance between the pace of removing Quantitative Easing and ending the nascent economic recovery.

In terms of equity exposures, we continue to focus on companies that are trading at parity (or at a discount) with the market at large, yet have higher earnings and dividend yields, strong business franchises and balance sheets, and better visibility of cash flow. The Absa Inflation Beater Fund continues to be positioned so as to minimize the risk of capital loss, whilst targeting a return in excess of inflation.