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.

Global bond yields were on a declining trend towards the end of June 2019, with the US 10 year generic yield ending the month 68 basis points lower than the start of the year. The decline in yields was mainly on the back of muted inflationary pressures, expectations of easing global monetary policy, as well as moderating global trade tensions. The South African benchmark yield also softened to 8.13% in the latter stages of the quarter after reaching a high of 8.598% in early May 2019.

A state of the nation address short of policy implementation plans and the worst quarter-on-quarter GDP print since the financial crisis have arguably limited risk- on sentiments for rand denominated assets. On a seasonally adjusted basis, South Africa's real GDP decreased by 3.2% quarter-on-quarter in the first quarter of 2019, following an increase of 1.4% in the fourth quarter of 2018. The three largest negative contributors were mining, manufacturing and trade industries, each moderating by 10.8%, 8.8% and 3.6% respectively.

Severe electricity supply disruptions, weak business confidence and investor caution ahead of the May 2019 national elections were seen as instrumental to the sharp contraction in economic output. Slower wage growth, an increase in the tax burden, as well as lacklustre employment growth also continued to weigh heavily on real household consumption expenditure. Household net wealth increases underpinned by gains in equity portfolios were mainly offset by declines in non-financial asset valuations as nominal house prices declined.

Headline consumer price inflation managed to sustain a range-bound trajectory, with the May 2019 print registering 4.5% year-on-year, while core inflation increased by 4.1% year-on-year. Risks to headline inflation appear moderately subdued on the back of low household credit extensions, a resilient exchange rate and decreasing global oil prices. The price of Brent crude decreased from $74 per barrel in May 2019 to $62 per barrel in June 2019 on concerns that sluggish trade war resolutions will keep demand levels depressed for an extended period of time.

On the 18th of July 2019, the SARB's MPC will deliver their decision on the policy rate, with the market currently pricing in at least two 25 basis-point rate cuts over the next 12 months. Although having a marginal impact, our outlook is that global monetary policy will remain accommodative until economic recovery and inflation is firmly re-established.

Bond yields were largely on a declining trend towards the end of the first quarter, following a peak during the month of February 2019. The decline in yields was largely on the back of attractive emerging market valuations, accommodative global monetary policy action, as well as subsiding global inflationary pressures. The South African benchmark yield strengthened to 8.540% after reaching a high of 8.937% in February 2019.

Notwithstanding inflation being on an upward trajectory over the first quarter, headline inflation continued to remain anchored within the South African Reserve Bank's (SARB) Monetary Policy Committee target range of 3% to 6%. Consumer price inflation for February 2019 printed in line with expectations at 4.1% year-on- year, while core inflation increased by 4.4% year-on-year.

On the 28th of March 2019, the SARB's MPC delivered a moderately dovish commentary, opting to leave the repurchase rate unchanged at 6.75%. The MPC cited risks to inflation being fairly balanced at this stage. Increases in global oil prices, elevated administered costs and above inflation nominal wage increases are expected to present upside risks over the next two years. We conversely look to muted demand pull inflationary pressures as well as a resilient exchange rate to induce a flat policy stance for the year 2019.

After the last trading day of the quarter, rating agency Moody's decided not to review the credit risk rating of the South African economy, leaving the outlook unchanged at stable, with a rating of one notch above sub-investment grade. Despite a much welcomed reprieve from the rand and bond market, considerable economic risks still continue to lurk over the short-to-medium term. Electricity supply constraints, a stubbornly wide output gap as well as greater counter-cyclical spending are envisaged to increase the borrowing requirement as a ratio of GDP.

Leading economic indicators across major developed markets currently suggest that growth is still in an expansionary phase, albeit having arguably peaked in the previous year. A no-deal Brexit, benign Eurozone PMI data, as well as a sluggish resolution to global trade tensions could largely underpin a moderating economic outlook. Slower than expected second round effects stemming from both fiscal policy intervention and full employment levels of output have also momentarily persuaded the Fed to pause the normalisation cycle.

Bond yields have been on a declining trend for most of the fourth quarter of 2018. This was on the back of lower government borrowing requirements, attractive emerging market valuations and a resilient currency. The South African benchmark yield strengthened to 8.873% after reaching a high of 9.357% in October 2018.

Greater counter-cyclical and infrastructure spending as well as elaborate education, welfare and health systems envisaged by government over the next few years, are however expected to increase the borrowing requirement as a ratio of GDP. This in turn may place upward pressure on local bond yields.

Notwithstanding consumer price inflation being on an upward trajectory during the fourth quarter, inflation carry still remained marginally positive. Consumer price inflation for November 2018 slightly surprised forecasts to the upside at 5.2% against consensus estimates of 5.1% year-on-year.

The South African Reserve Bank's (SARB) Monetary Policy Committee (MPC) delivered a moderately dovish commentary following a 25 basis-point increase in the repo rate on the 22nd of November 2018, from 6.5% to 6.75%. However, economic frailties and muted demand pull inflationary pressures will likely induce a flat policy stance for the year 2019.

Decreasing global oil prices in the fourth quarter also pushed global inflation expectations lower, thereby increasing demand for bond securities. Surpluses in oil production levels again saw the price of crude oil tumbling to an 18 month low of 50 USD per barrel at the end of the quarter, after peaking at approximately 86 USD per barrel during the month of October 2018.

In the US, policy makers have been largely concerned with escalations in employment, household spending and fixed private investment expenditure. A twisting yield curve as well as a sluggish trade war resolution with China have conversely led to economic risks remaining fairly balanced, with the outlook on Fed policy appearing less restrictive in 2019 than previously anticipated.