The Absa Inflation Beater Fund invests in a strategic mix of domestic assets which is designed with the objective of generating a return of CPI plus 3% per annum over a rolling 3-year term, while trying to minimize the risk of losing money in any one year. Assets in the fund include: inflation-linked bonds, fixed-interest bonds, money market, equity and property. Assets selected for this fund are chosen carefully, based not only on return, but also with a view to minimize the potential downside risk of the portfolio.

The SA equity market was negative in the third quarter of 2018. The negative performance was primarily driven by the industrial sector; Resources and Financials outperformed returning 5.2% and 2.8% respectively. The underperformance in Industrials was driven by companies such as Naspers, Aspen and MTN. The poor equity market have been a concern for the year; we believe that the equity market will remain under pressure until the national elections next year. The SAPY continued to extend its losses for the year although the magnitude has slowed. Fixed rate bonds and inflation linked bonds were flat for the quarter. There are concerns that inflation will be increasing as a result of the higher oil price and weaker currency. Although these concerns are valid we remain of the view that inflation will remain within the SARB's target range. It should be noted that diversification offshore was not about the currency unlike the second quarter, World markets returned c.5.1% in US$ the conversion resulted in c.8.3% returns. This is still better than the domestic asset classes.

The Fund continued to outperform its benchmark (CPI+3%) on a rolling 1-year by over 2%. The improvement came as a result of increased focus on risk premium harvesting and portfolio optimization to deliver CPI+3% while minimizing risk of capital loss.

The Absa Inflation Beater Fund invests in a strategic mix of domestic assets which is designed with the objective of generating a return of CPI plus 3% per annum over a rolling 3-year term, while trying to minimize the risk of losing money in any one year. Assets in the fund include: inflation-linked bonds, fixed-interest bonds, money market, equity and property. Assets selected for this fund are chosen carefully, based not only on return, but also with a view to minimize the potential downside risk of the portfolio.

We expected the positive sentiment from December 2017 to continue into 1Q18 for all the asset classes, the trade was BUY Domestic and SELL International. This renewed market sentiment resulted in us expecting the equity market to deliver double digit returns in the first quarter. The equity market started the year very positively until late January 2018 when the property market took a dive coupled with a mixed performance within the industrials sector. The biggest driver of the industrial sector, Naspers, declined 16.2% in 1Q18 coupled with some rand hedges as a result of the stronger currency. The entire equity market declined 6.0% with property declining 19.6%. The decline in the property market was focused on one particular group of companies: Resilient, Fortress, NEPI Rockcastle and Greenbay. Notably, this group of companies accounted for 36.2% of the South African Listed Property Index (SAPY). Meanwhile, Fixed Income continued to perform in line with expectations, at these current levels we believe that bonds are trading at fair value.

An improved position in fiscal metrics and the new ANC leadership's commitment to deal with corruption and reform state-owned enterprises has reduced political and downgrade risks in the immediate future. Consequently, investor confidence improved towards the last quarter of 2017 as the political tide turned positive and this resulted in positive revisions to the growth outlook for 2018. Meanwhile, the inflation outlook for 2018 remains benign due to the recent experience of significant ZAR appreciation. South Africa's growth dynamics are more positive than previously thought due to easier monetary conditions coupled with improving consumer confidence. The recovery in investment expenditure experienced in 4Q17 is expected to continue in 1H18 driven by both public and private sector activity. South Africa's fiscal position is expected to improve in 2018 owing to:

" Envisaged fiscal consolidation;
" Improved SOE governance under the stewardship of the newly appointed Minister of Public Enterprise, Pravin Gordhan;
" Improved tax collection due to VAT increases; and
" A pick-up in business activity.

The Fund improved its rolling 1-year performance as at the end of March 2018 by 1.0% relative to the target return of CPI+3 compared to the same period as at the end of December 2017. The improvement came as a result of increased focus on risk premium harvesting and portfolio optimization to deliver CPI+3 while minimizing risk of capital loss.

The Absa Inflation Beater Fund invests in a strategic mix of domestic assets which is designed with the objective of generating a return of CPI plus 3% per annum over a rolling 3 year term, while trying to minimize the risk of losing money in any one year. Assets in the fund include: inflation-linked bonds, fixed-interest bonds, money market, equity and property. Assets selected for this fund are chosen carefully, based not only on return, but also with a view to minimize the potential downside risk of the portfolio.

The last 3 months of 2017 have been characterized by a strong rebound in domestic demand- in particular, a strong recovery in agriculture and mining sector GDP. Economic data release over the quarter showed that South Africa’s 3Q GDP growth expanded by 2%, much faster than expectation:

1. The driver of better than expected economic expansion was the agriculture sector GDP growth of 44% as it recovered from drought in 2016/17. The sector contributed about 50% of the 3Q GDP growth alone;
2. Mining sector GDP growth of 6.6% was much stronger than implied by mining production data;
3. Gross fixed capital formation grew at 4.3% despite falling business confidence indicators; 4. Private consumption rose 2.6% in line with retail sales growth. Tailwinds to private consumption were lower food and fuel prices and rise in real disposable income;

Much of the asset price volatility including the exchange rate of the rand was driven by political events linked the ANC elective conference in December. The macroeconomic backdrop was supportive of asset price inflation while political risk heightened associated asset price volatilities. Consequently, as the political outcomes of the elective congress unfolded most favourably, the year ended with a strong rally in the currency, the bond and the property markets. For 4Q2017, property was the best performing asset class followed by equities. For the full year 2017, the total return on nominal bonds was 10.2%; cash returned 7.5% and inflation-linked bonds returned 2.8% - all significantly behind equities that returned 21%.

Consumer price inflation rate remained within the SARB target range of 3-6% through-out the quarter with expectations revised lower due lower food and energy prices. However, diminishing tailwinds from lower food and energy prices, as well as stronger rand will in time prove to be headwinds for the benign inflation outlook as well as retail sales growth. Weak retail sales data in September and October pointed to a slowdown in household consumption expectations for 4Q2017 and 1Q2018. Also, agriculture sector growth is expected to normalise in 2018 as the effects of drought-driven recovery subside and a bumper maize crop in the US keeps dollar-price of maize in check. Inflation expectation for 1Q2018 likely to be driven by rand volatility, energy costs and an end to falling food prices. NERSA has granted Eskom a low electricity tariff increase of 5.2% instead of the 19.9% requested for 2018/19 period and at the same time with political risks reducing, the US dollarrand exchange rate has been relatively strong in recent history. All of this is seen to be in support of our benign inflation outlook in the medium term.

The Fund improved its rolling 1-year performance as at the end of December 2017 by 2.8% relative to the target return of CPI+3 compared to the same period as at the end of September 2017. The improvement came as a result of increased focus on risk premium harvesting and portfolio optimization to deliver CPI+3 while minimizing risk of capital loss.

At the time of writing this report, the mix of assets in the Absa Inflation Beater Fund was:
Money market 7.8%
Inflation linked bonds 8.2%
Fixed rate bonds 2.7%
Floating interest rate bonds 77.0%
Domestic Equity 0.3%
Domestic Property 4.0%

Total 100%