"Beyond QE: An end to cheap money?"
There can be no doubt as to the significant impact the unwinding of the US quantitative easing program will have on world markets. Statements by Mr Bernanke in June triggered a selloff in global markets as investors' factored in their pricing an end to an era of cheap money. Data coming out of the US will be of importance going forward as the Federal Reserve Chairman stressed that changes to the QE program will be dependent on economic data. Locally, the flow reversal in non-resident capital that was evident last month was stronger in June. Last year total non-resident flows were positive at over R83bn in the bond and equity markets combined. In contrast, the year to date non-resident flows for 2013 are currently around R18bn. This figure may be eroded in the coming months if the current trend for capital flows continues. The sensitivity of the Rand and the bond yields to the flow of capital has negative implications on local imported inflation, the current account deficit and the financing costs for government debt. Continued weakness and lackluster growth figures may force the SARB to increase rates while the economy is weak, if inflation figures remain firmly above the 6% target limit.

The most recent PPI and CPI inflation figures showed moderation from the previous month's figures and both numbers came in below consensus expectations. CPI inflation figures were lower than the previous month by 0.3%, printing at 5.6% y-o-y. This was lower than the consensus expectation. Although the decrease in the petrol price contributed to the lower y-o-y CPI inflation figure, food inflation increased by 0.4% to 6.7% y-o-y. Inflation is expected to remain within the SARB target band in the short term, although temporary breaches may occur. The lower PPI figure of 4.9% y-o-y from 5.4% last month, lends some support to this view. In light of the current data, we expect the MPC to maintain the current monetary policy stance while inflation figures remained contained in the band and growth figures remain weak.

Growth in money supply and PSCE y-o-y figures decreased from last month's figures. M3 printed at 9.75% y-o-y while PSCE came in at 9.05%. The decrease in credit numbers was due to a deceleration in both corporate and household credit growth, although the percentage decrease in household credit growth was the larger of the two. Further moderation in credit figures is expected given the challenging business environment and the high levels of indebtedness of consumers. Consequently, the SARB should not be too concerned with the somewhat weak demand pressures on inflation which support the current accommodative stance.

The Nedgroup Investments Core Income Fund continues to outperform its benchmark. The fund continues to be exposed largely to banks (96% in May) while 4% of the fund is in government and corporate debt.

The lower inflation figures provide support to the current monetary policy and the forecast shows that the SARB will likely hold the repo at 5% until year end. There is risk to this outlook due to the uncertainty of when the US will begin unwinding QE and the market reaction that would follow. The low interest rate environment is expected to persist, however the markets are pricing in rate hikes within 12 months. Any changes in monetary policy, domestic and abroad, will be dependent on significant changes in economic data.

"After the 13th Baktun…."
From Mayan predictions to super storm Sandy to near sovereign crises - we and the markets have survived. The Eurozone still exists after sovereign default fears over Greece and Spain. Obama is still president of the US after a nail biting election and he managed to cut a deal in Congress to avert the full impact of the fiscal cliff. With an increase in last minute resolutions, it seems politicians and national treasuries were doing all they could in the past year to keep markets guessing!

Locally, GDP forecasts were revised downwards and are now a far cry from the 7% growth needed to alleviate unemployment. After championing "doing more with less", the fiscus will now expect higher budget deficits. In the private sector, labour wage settlements were higher than inflation after violent protests while productivity is not increasing at the same pace. There is a lot of work ahead in the coming year (not least for the Government), and given disappointing growth numbers, we expect the low interest rate environment to persist.

Inflation was in line with the consensus estimate and unchanged from the previous month's figure at 5.6% y-o-y. Inflation has been on a downward trend over the year and contained within the target band. Food prices continue to push recent inflation figures higher and the upcoming changes to the inflation basket in the New Year are expected to add to the y-o-y figures. PPI was unmoved from last month's figure at 5.2% y-o-y, just under the market estimate. Views on inflation and monetary policy are currently neutral with the market wary of significant changes in growth and inflation data in the months ahead.

Growth in money supply increased, coming in at 6.3% y-o-y. PSCE was on an upwards trajectory over the year, from 6.2% in January 2012 to the current month's figure of 9.6% y-o-y. Concerns continue to be raised with regards to the unprecedented growth of unsecured lending, and we may see the introduction of regulation aimed at reducing over-indebtedness of households in the coming year. Mortgage advances still show slow growth despite the low interest rate environment. Current credit figures, however, are unlikely to cause a change in the monetary policy over the short term. The Nedgroup Investments Core Income Fund continues to comfortably outperform its benchmark. The Fund continues to be exposed largely to banks (96% in December), while the remaining 4% is invested in government and corporate debt.

It has been a year of averting disasters and the risks to global growth from sovereign crises remain. Local politics and labour unrest remain a concern in the coming year and against this backdrop, local growth figures are likely to be suppressed. Inflation, however, is well within the mandated target band. Given that the SARB aims to stimulate growth while balancing inflation risks, the current data indicates that interest rates will be low for some time to come.

"Balancing the Nation's books"

Market sensitivities were tested when the minutes of the US Federal Reserve January meeting indicated that some members were considering reducing stimulus earlier than expected. Major bourses were in the red across the globe showing confidence is still low and perceived contagion risk still high. Locally, the budget speech by the South African Finance Minister took center stage. The fiscus expects higher deficits in the coming year than previously announced, mainly due to revenue figures being lower than estimated. The revenue forecast over the coming three years is also of concern, with estimates of revenue growth higher than those of GDP. The Treasury, however, does appear to be placing focus on allocation and use of funds in line with the National Development Plan goals. It is crucial that the fiscus is seen to be policing use of funds while sticking to the budget, as the currency is vulnerable to the sentiments of foreign investors. The current account deficit in particular would worsen dramatically if the positive capital inflows in the bond and equity markets were to reverse.

Inflation figures were a shock to many, printing well below consensus at 5.4% y-o-y. It was the first reading from the CPI basket using the new weights. Moderation in food prices contributed to the lower than anticipated figure. The new basket reduces the weight of food and increases that of petrol and electricity. With higher Eskom tariffs and increases in the petrol price scheduled, expectations are for inflation to breach the SARB target by the middle of this year. Views on monetary policy are neutral with the market paying close attention to domestic growth and inflation figures. Increased volatility and depreciation of the rand in an environment with negative real rates and declining growth figures, would limit the ability of the SARB to provide further stimulus to the economy.

Growth in money supply increased to 6.7%, after decreasing to 5.2% y-o-y last month. After posting encouraging figures on corporates at the last print, PSCE fell to 8.6% y-o-y mainly due to lower advances to corporates. Unsecured lending to households still shows strong growth, however, growth in mortgage advances is still weak. Increased attention to unsecured lending as well as comments from credit providers that they will be tightening their lending criteria, may see a reduction in the credit extended to households over the coming year. In light of this, some moderation in household consumption can be expected.

The Nedgroup Investments Core Income Fund continues to comfortably outperform its benchmark. The Fund is exposed largely to banks (94% in February), while the remaining 6% is invested in government and corporate debt.

Both the fiscal and monetary policy positions are vulnerable to the rand, poor growth figures and a deteriorating inflation outlook. Data in coming months will be important in determining the direction of monetary policy changes going forward and the ability of the fiscus not to exceed the projected deficit. The February budget speech reiterated the Treasury's mission of doing more with less, reflected in the fiscal deficit figures decreasing over the forecast period. On the other hand, indicators remain supportive of the SARB's accommodative stance on monetary policy, which is encouraging as large fiscal stimulus will be unlikely, given indication by the Treasury that spending will be reined in.