Investec STeFI Plus comment - Sep 12 - Fund Manager Comment23 Nov 2012
Market review
Foreign flows remained the dominant driver for the quarter as investors continued their global search for yield. Net inflows into the South African bond market were close to R30 billion for the quarter. Further impetus for flows was also provided by South African government bonds' anticipated inclusion in Citigroup's World Government Bond Index. We have seen record year-to-date inflows of close to R80 billion. With South African inflation subdued for now, the relatively high yields are attracting foreign investors who face near-zero yields in their home markets. These foreign flows are dominating the market and local data has been largely ignored. Bonds added 5% in the quarter to record gains of 13.1% for the year to date. Longer-dated bond yields fell by 50 basis points over the quarter. Cash, as measured by the STeFI Composite Index, added a marginal 1.4% over the quarter and 4.2% for the year to date. There are a number of risks on the horizon. The rand has been sluggish, despite the record inflows into our market and may well be reflecting some of the local risks. Slowing growth could put further pressure on the national budget and an already widening current account deficit. This is not sustainable in the long run. Political uncertainty around nationalisation and the direction of economic policy is also weighing heavily on the outlook. It was thus not surprising that rating agency Moody's decided to downgrade the country's credit rating. Another concern is that we remain on negative watch with all three major rating agencies. Bonds could weaken from here as investors demand a higher premium to hold South African bonds in this environment. Some of this higher premium can already be seen in the steepness of the yield curve. Investors are demanding a substantially higher yield to lend money to the government for more than 10 years. The rand is likely to weaken, should foreign flows dry up. A weaker rand would feed through into higher inflation, making the South African Reserve Bank's job more difficult against a backdrop of subdued growth.
Portfolio review
The Investec STeFI Plus Fund (- previously Investec Cash Plus Fund) gained 1.4% over the quarter. We continued to keep the fund very defensively positioned from a duration perspective, given the political uncertainty and labour unrest.
Portfolio positioning
We aim to maximise the yield by holding highly rated floating-rate notes and corporate bonds. In this environment where cash yields are likely to remain low for a prolonged period, non-government spreads offer good risk-adjusted yields.
Investec STeFI Plus comment - Jun 12 - Fund Manager Comment26 Jul 2012
Market review
The second quarter of 2012 was very volatile as the world continued to worry about the woes of Europe and faltering global economic growth. The bond market shrugged of these concerns and returned a very impressive 5.2%, helped by improving inflation and record foreign inflows. Cash, as measured by the STeFI Index, delivered 1.4% for the quarter. With the sharp pullback in the oil price and a decent moderation in food prices, we have seen consumer inflation drop back inside the official target band. This is broadly in line with our forecast that rates will remain on hold well into next year. Due to the sharp slowdown in global growth, the risk is now that the South African Reserve Bank will cut the repo rate later this year. Bonds were further buoyed after foreigners bought R21.3 billion worth of bonds in June, a new monthly record. These flows were driven in part by the confirmation that South Africa would form part of the Citibank World Government Bond Index in October. The market received a further lift, thanks to the belief that European leaders will finally show some leadership and implement concrete steps to help solve the banking and debt crisis in that region. The rand also benefited from these flows and we saw the local currency closing below R8.20 against the US dollar. The euro region remains the biggest concern going forward as growth has stalled and political uncertainty could easily trigger another bout of asset selling. It is thus important to keep abreast of euro-zone developments. China is also showing signs of slowing down, which adds to the probability of another soggy growth patch. On the local front, the economic data was more mixed. Good inflation numbers were offset by a higher than expected current account deficit.
Portfolio review
The Investec STeFI Plus Fund (- previously Investec Cash Plus Fund) gained 1.4% over the quarter. The fund remains very cautiously positioned from a duration perspective.
Portfolio positioning
The current account deficit will weigh heavily on the rand and make the local currency vulnerable to foreign sentiment. Growth and unemployment continue to disappoint and at the next few meetings the monetary policy committee will consider the next course of action for interest rates. The market is currently pricing in around a 30% to 40% probability of a cut before the end of the year. Interest rates are likely to remain low well into 2013, as we see inflation continuing to ease. Bonds have performed very well over the past year with a return of just under 15%. This is well in excess of bond yields and nearly three times more than the return from cash. In our view, this is not sustainable. We continue to take profits in order to protect some of this capital gain, by reducing the duration in our portfolios. We look to maximise the yield by holding floating-rate notes and some corporate bond exposure. Non-government spreads continue to offer good risk adjusted yields and with interest rates likely to remain unchanged at low levels for a prolonged period, we will continue to try and benefit from the yield pick-up they offer to short rates.
Investec STeFI Plus comment - Mar 12 - Fund Manager Comment02 Jul 2012
Market review
The bond market started the year on a strong note as yields rallied across emerging markets. Economic data indicated that global growth was starting to show signs of a sustained recovery. This saw risk assets performing well as investors started searching for yield. The rand appreciated as foreign inflows into South Africa increased. The European crisis, while not yet averted, diminished slightly as Greece finally settled on a deal to reduce its debt levels. This gave bond investors further encouragement to invest in emerging markets again. Sentiment was further helped by the European Central Bank's assistance to European banks by lending them money through the long-term refinancing operation (LTRO) programme, aimed at increasing liquidity and encouraging the buying of government debt. This led to aggressive rallies in yields across the 'troubled' European bond markets like Italy and Spain. The momentum added to the goodwill towards emerging markets.
On the local front, the All Bond and Listed Property indices returned 2.4% and 8% respectively over the quarter. The rand gained more than 5% against the US dollar, reflecting the broader rotation into riskier assets. Cash, as measured by the STeFI, returned 1.4% over the review period. The minister of finance delivered a much improved budget, demonstrating his commitment to tight fiscal management. The South African Reserve Bank (SARB) remains concerned with the twin dilemmas of rising inflation and sluggish growth. While inflation is nearing its peak, it is still outside the target band and a stubbornly high oil price is ensuring that inflation remains elevated. Some good news was the announcement by Eskom that this year's price increase will be reduced from 26% to 16%. While we are seeing small gains in the employment numbers, these are still below the required level. Growth in the economy is showing signs of improving, but is still lagging levels seen before the global credit crisis and we will be lucky to achieve growth of 3% over 2012. This is keeping cash rates at multi-decade lows, translating into negative real returns for investors.
Portfolio review
The Investec STeFI Plus Fund (- previously Investec Cash Plus Fund) gained 1.3% over the quarter. Due to the global uncertainty, we maintained a very conservative portfolio from a duration perspective. We are holding short-dated instruments that are offering yield enhancement. In this environment where cash is lagging inflation, we have increased our exposure to both floating-rate notes and corporate bonds.
Portfolio positioning
We expect the SARB to keep interest rates on hold for the remainder of the year, which should anchor rates across the curve. Bonds recently sold off and are getting close to levels seen in January. At these higher yields, bonds are offering value and we will look to add some duration to the portfolio.
Sector Changed - Official Announcement09 Mar 2012
The fund changed sectors from Domestic--Fixed Interest--Varied Specialist to Domestic--Fixed Interest--Income on 01 Mar 2012, fund keeps its history.
Investec STeFI Plus comment - Dec 11 - Fund Manager Comment21 Feb 2012
Market review
In the final quarter of the year, markets continued to be dominated by global events. The European sovereign debt crisis remained the main focus internationally, as markets priced in a mild recession in the region and Italian and Spanish bond yields surged. Better than expected data in the US provided a bright spot, despite the continuing effects of the political stalemate on the fiscal side there.
Quarterly returns for the bond market were a healthy 3.5% while cash, as measured by the STeFI Index, returned 1.4%. Yields ended the quarter modestly lower, after a largely range-bound period, with the rally into early November quickly dissipating as the market priced out any likelihood of further interest rate cuts. The huge outflows seen in the bond market in the third quarter turned more mixed in the fourth. With 3-month money market rates anchored around the repo rate at 5.5%, 1-year yields crept higher as anticipated cuts turned into anticipated hikes. The market has now fully priced in a first hike in early 2013.
Portfolio review
As expected, inflation continued to move higher through the quarter, breaching the top of the South African Reserve Bank's 3%-6% band with the November release at 6.1%. Food and transport costs were the primary drivers of inflation and we expect the headline number to top out in the next month or two. Activity data was generally mixed during the quarter. The Purchasing Managers Index rebounded quite strongly after the strike-related action earlier in the year and retail sales were higher than expected. However, the recovery is not a particularly strong one, as evidenced by the disappointing third quarter GDP number. This combination of lackluster growth and high inflation, against the backdrop of global uncertainty continues to pose a serious dilemma for the Reserve Bank. For the moment, however, it appears that keeping rates on hold is the likely course.
During the quarter, the Investec STeFI Plus Fund (- previously Investec Cash Plus Fund) maintained some exposure to shorter-dated bonds and was well positioned to take advantage of attractive credit spreads. The fund returned 1.4% over the quarter and 5.8% for the year.
Portfolio activity
Given the very high levels of uncertainty in markets, we have maintained a very cautious stance. We remain positioned in the short end of the curve for now as we expect continued pressure in the long end from government funding. We still favour highly rated credit, particularly floating-rate notes, and will continue to selectively add them to the portfolio where spreads look attractive.
Portfolio positioning
The crisis in Europe is likely to continue to weigh on global risk appetite well into 2012, although concerns over the extent of the global slowdown have eased a little in recent weeks. The backdrop remains one of heightened uncertainty; however, the market has now priced in a fair amount of bad news.
The Rand and the bond markets will continue to take their cue from the broader global environment. Although the possibility of another interest rate cut has receded, the South African Reserve Bank will remain acutely conscious of both global and local growth trajectories. The Bank is likely to respond to any further deterioration, despite the impact that a weaker Rand will have on inflation. Slowing growth, high inflation and hefty issuance will combine to keep the yield curve steep over the medium term.
We will continue to position the portfolio to take advantage of the attractive spreads offered in the credit markets. We are also likely to maintain a relatively cautious position on duration, although we do believe that further weakness in the long end will start to make it look attractive. With only modest exposure to the bond market and highly rated credit, the risk to the portfolio of a big sell-off in yields remains limited.