The MPC surprised most of the market by cutting rates by 25bpts in July but mentioned that they will reverse their move in rates should conditions change. The repo rate was left unchanged at the September meeting and the MPC lowered their inflation forecasts for 2018 from 5% to 4.9% and from 5.30% to 5.20% for 2019. In the September statement the MPC stated -the second quarter growth outcome, while positive, does not change our growth forecast significantly, and the outlook remains weak. The MPC assesses the risks to the revised growth forecast to be slightly on the downside- and ended the statement saying -Given the heightened uncertainties in the economy, the MPC felt it appropriate to main the current monetary policy stance at the is stage, and reassess the data and the balance of risks at the next meeting. The 2017 GDP forecast was brought lower too.

In August, Moody’s kept the South African sovereign rating unchanged but revised its GDP forecast for 2017 to 0.5% from 0.8% and for 2018 to 1.2% from 1.5%. The agency highlighted concerns that could lead to a downgrade as being around the success in safeguarding South Africa’s institutional, economic and fiscal strength. The country’s credit ratings will be closely watched as we run the risk that, should there be further downgrades, South African government bonds could be excluded from certain global bond indices and this could therefore lead to possible significant portfolio outflows. The next review comes up in November.

The quarter ended with ZAR weakness as the dollar strengthened on talks of Trump tax reform. As a result the FRA curve sold off with the 6x9 FRA selling off by 21bpts pricing in a less chance of further repo rate cuts. For the quarter return 1.82%

Key events for the last quarter of the year, we have the Medium Term Budget Policy Statement on the 25th October and the ANC Elective Conference will be held in December where we await to hear who the new leader of the ANC will be. We also await the possible confirmation of the US rate hiking cycle as the Federal Reserve have indicated to hike rates a final time in December.

PERFORMANCE COMMENTARY
The Fund has generated positive levels of income in excess of returns made available through deposits and call accounts offered by banks. Since inception, the Fund has outperformed its benchmark, whilst providing capital protection and liquidity for investors. The Fund rarely experiences periods of underperformance but does ultimately have a long term emphasis. A long term view and capital losses can result in short term underperformance. However, the long term performance, net of fees, is indicative of the reduced downside risk that the fund offers.

On the 30th March the Finance Minister Pravin Gordhan and several other ministers were replaced in a cabinet reshuffle which prompted the credit rating agencies to react. All three major credit rating agencies downgrading the sovereign ratings of South Africa. S&P and Fitch now have South Africa’s long term foreign currency credit rating at sub-investment grade and Moody’s is at investment grade with a negative outlook. The country’s credit ratings will be closely watched as we run the risk that, should there be further downgrades, South African government bonds could be excluded from certain global bond indices and this could therefore lead to possible significant portfolio outflows.

We saw the inflation rate printing within the target band of 3 % to 6% in the second quarter with April and May 2017 printing at 5.3% and 5.4% respectively, coming off from 6.6% in Jan 2017. The MPC lowered its inflation forecast for 2017 & 2018 even further at their May meeting, from 5.9% to average 5.7% in 2017 and 2018 average CPI was forecast to be at 5.3% from 5.4% previously. Regardless of the improvement in the inflation outlook the MPC decided to leave the repo rate unchanged at 7% in May, citing ''the inflation forecast to be uncomfortably close to the upper end of the target range.'' Due to the events at the end of Q1 which caused the sell-off in the Rand, the FRA curve moved out pricing rate hikes. However, Q2 has seen the curve end lower to reflect a 100% chance of a 25bp cut by March 2018. Short term NCD rates followed the FRA curve and rallied over the quarter. Cash returned +1.85% for the quarter.

PERFORMANCE COMMENTARY
The Fund has generated positive levels of income in excess of returns made available through deposits and call accounts offered by banks. Since inception, the Fund has outperformed its benchmark, whilst providing capital protection and liquidity for investors. The Fund rarely experiences periods of underperformance but does ultimately have a long term emphasis. A long term view and capital losses can result in short term underperformance. However, the long term performance, net of fees, is indicative of the reduced downside risk that the fund offers.