The Fund Commentary is provided on a quarterly basis and can be found on www.absainvestmentmanagement.co.za under Unit Trusts Minimum Disclosure Documents. The latest quarterly commentary available is for the quarter ending 30 September 2019.

An eventful second quarter witnessed local growth (for Q1-2019) disappoint. Global markets also became more fearful of economic growth slowing as a result of resumption of the USA vs. China trade war rhetoric. As a consequence rates markets became dovish and started pricing for rate cuts in the USA as well as domestically.

South African equities started the quarter strongly ending 2Q19 in positive territory, the JSE All Share index printed a total return of 3.9% in 2Q19. This strong performance did not come without volatility, the market delivered 4.2%, -4.8% and 4.8% for April, May and June respectively. In the quarter, Financials were the best performers followed by Industrials and lastly Resources. The property sector fared better in 2Q19 relative to 1Q19, the sector returned 4.5% for the quarter. Cash and Bonds returned similar returns as 1Q19, 1.8% and 3.7% respectively.

Global markets started 2Q19 strong until May when trade tensions between the US and China resumed. Towards the end of the quarter, during G20, there were signs that a temporary deal was possible between the US and China. The US FED has put rate hikes on pause; the market has priced in rate cuts despite the US economy growing significantly above trend. Rate cuts are indicative of concerns that US growth will be slowing in 2019 even pricing a possibility that the economy could end up in recession. US tax cuts will normalize in 2019 but the continued decline in unemployment means there are still legs in the economy; consequently we should expect a slowdown rather than a recession. BREXIT will continue to be a headline for 2019.

In the first half of 2019 equity markets have performed strongly but there are some headwinds in the South African economy as a result of local and foreign factors. We have avoided the Moody's downgrade but the rating agency will be knocking at our doors in the second half of the year. There are still concerns surrounding Eskom and other State Owned Enterprises. Inflation is expected to remain within the band meaning we should not expect pressure from the SARB. It should be noted that there is always a risk of the oil price increasing and the currency depreciating to the assumption of subdued inflation.

Despite these factors the Absa Inflation Beater Fund performed in line with expectation meeting its target of CPI+3% for all periods since inception. The fund delivered a 3.2% and 6.2% return for 2Q19 and 1H19 respectively, these numbers were above the target return of CPI+3% for the same period (2.4% and 3.7% for 2Q19 and 1H19 respectively). The focus remains portfolio optimization to deliver CPI+3% while minimising risk of capital loss.

South African equities started the year strong ending 1Q19 in positive territory relative to 1Q18, the JSE All Share index printed a total return of 8.0% in 1Q19. The strong performance was from resources and industrials while financials were flat. The property sector started the year strong delivering a total return of 9.2% in January 2019, this was the sectors best monthly total return since March 2016, to ending the quarter 1.5% up. Cash returned 1.7% and bonds around 3.8% for the quarter.

Global markets rebounded in 1Q19 as the trade tensions between the US and China eased and the US FED put rate hikes were put on pause. Towards the end of the quarter there were signs that a temporary deal was possible between the US and China. However, it is clear that the US is looking to change the relationship and the treatment of intellectual property. We should assume that things will get worse before they get better in this process, this will probably not bode well for the other Asian economies. The US FED has put rate hikes on pause as they see inflation as being under control. There are concerns that US growth will be slowing in 2019 even a possibility that the economy could end up in recession. The tax cuts will normalize in 2019 but the continued decline in unemployment means there are still legs in the economy, we should expect a slowdown rather than a recession. BREXIT will continue to be a headline for 2019.

The equity markets have started 2019 strong but there are some headwinds in the South African economy for the remainder of the year. The country has entered an election year which the outcome will have consequences for the macro landscape. We have avoided the Moody's downgrade but the rating agency will be knocking at our doors post elections. There are still concerns surrounding Eskom and their ability to keep the lights on; the impact load shedding will have on the economy. Inflation is expected to remain within the band meaning we should not expect pressure from the SARB. It should be noted that there is always a risk of the oil price increasing and the currency depreciating to the assumption of subdued inflation. Even though all these factors are there the Absa Inflation Beater Fund performed in line with expectation meeting its target of CPI+3% for all periods since inception. The focus remains portfolio optimization to deliver CPI+3% while minimizing risk of capital loss.

The S&P500 index finished 2018 down 4% (inclusive of dividends) - the worst year since the global financial crisis. At its peak, however, the US equity market was up 10% with a fall of 14% since. South African equities didn't fare better - the JSE Allshare index printed total returns of -8.5% for 2018. Property, for example, suffered losses amounting to roughly 25%, inclusive of distributions for the year. Cash returned 7.3% and bonds around 7.7% for the year.

The financial markets become increasingly worried during 2018 of global trade tariff discussions as well as increased rates, specifically in the USA. The US-FED received a lot of criticism for hiking rates in December; this rhetoric was followed with a number of committee members expressing dovish comments which had a calming effect on the markets.

The financial markets have seen asset volatility increase during the latter part of 2018 - we expect this trend to continue. The markets have to digest a significant number of events during 2019 which include BREXIT, trade tariffs, European balance sheet reduction and rate increases as well as significant economic policy uncertainty.

In South Africa we have witnessed a number of disappointing quarters of asset returns. 2018 will be remembered for an oil-shock with disastrous consumer spending consequences. The domestic economy faced a number of headwinds including inflation fears. We expect 2019 to witness increased growth with contained inflation.

Our focus is on establishing performance aligned to our mandates which reflects risk adjusted returns in the most efficient manner. We continually assess our portfolios in the light of market events to ensure we remain focused on our core objectives.