The SARB announced that it would keep interest rates on hold at 6.5% at its September MPC meeting, and its latest quarterly projection model pointed to no interest rate changes through year-end. The growth outlook for 2020 and 2021, however, was revised down from 1.8% to 1.5%, and from 2.0% to 1.8% respectively. Preliminary results showed that GDP expanded 3.1% in the second quarter, well above market consensus of 2.5%. With inflation under control at 4.3% y/y in August, the SARB also lowered its inflation forecast for 2019 to 4.2%, from 4.4% previously. Ratings agency Moody’s announced that it would keep SA’s growth forecast for 2019 at 0.7%, after revising it down from 1.1% in June. Moody’s is currently the only credit-ratings agency that has not downgraded SA to sub-investment grade.

In a string of poor economic data, retail sales dropped from 2.4% y/y in June to 2.0% y/y in July; the Absa Purchasing Managers’ Index declined to 45.7 in August from 52.1 in July (well below the 51.4 market consensus); and manufacturing production contracted 1.1% y/y in July from +3.6% y/y in June. The government’s gross loan debt increased to 58.3% of annual GDP for Q2 2019, surpassing the February 2019 budget’s projection of 56.2% for the full 2019/2020 fiscal year.

In September, the BEASSA All Bond Index posted 0.5%, inflation-linked bonds (the Composite ILB Index) delivered 0.4%, and cash as measured by the STeFI Composite Index returned 0.6%.

The fund returned 10.8% over the past 12 months, compared to 11.4% delivered by the All Bond Index over the same period.

South African assets were boosted over the quarter primarily by the easier global monetary outlook, recording gains across all asset classes. This mixed with some still-gloomy sentiment locally. The economy emerged with growth of 0.8% in 2018, slightly above expectations. Still, this was a very weak absolute growth level, and the SARB is now projecting only 1.3% GDP growth for 2019 (down from 1.7% previously), not including the negative impact of any ongoing electricity cuts.

Apart from the US Fed emphasizing that it would be "patient" when it came to raising interest rates further, which bolstered bond markets around the world, SA bonds rallied on several local factors, as the BEASSA All Bond Index delivered 3.8% for Q1: the yield on the benchmark R186 bond (due 2032) fell from around 8.9% at the start of the quarter to end at around 8.6%. These supportive factors included good investor demand, subdued inflation (February CPI at 4.1% y/y, below the SARB's 4.5% midpoint target) and the SARB's decision to keep interest rates on hold at both its January and March MPC meetings. The SARB's latest interest rate projection model showed only one 25bp rate hike this year. Also importantly, Finance Minister Tito Mboweni's February Budget was greeted favourably by most analysts, reinforcing the government's commitment to reining in the budget deficit and cutting spending, while also reforming and reducing wastage at the parastatals.

The bond rally also occurred against the backdrop of the expected 29 March Moody's sovereign credit rating report. While many were pessimistic, Moody's final decision not to review the rating and leave it at investment grade with a stable outlook granted the country a big reprieve on the final trading day of the quarter, with the R186 rallying 10bps on the day. Further bond gains were, however, only reflected after quarter-end.

However, the SARB remains concerned about future inflationary pressures arising from the weaker rand, as well as higher costs from fuel and electricity, among other sources. SA inflation-linked bonds, meanwhile, again performed rather poorly in the low-inflation environment, returning 0.5% over the three months, while cash (as measured by the STeFI Composite) delivered 1.8%. Despite US dollar strength, the rand lost only 0.5% versus the greenback, but 2.1% against the UK pound sterling, while gaining 1.3% against the euro, which was hit by growth concerns and more dovish interest rate expectations.

Other worries remained Eskom's generation capacity and the negative impact of load-shedding on growth in 2019, the land expropriation debate, nationalisation of the SARB, and last but not least, the upcoming May elections.

Over the quarter the primary bond market issuance volume (excluding government issuances) was R35,5bn, up from both Q1 2018 and Q4 2018 where the issuance averaged at around R31bn.

As with previous quarters, issuance activity remains dominated by financials. State-owned enterprise issuances continued to gather pace driven by the three Development Funding Institutions coming to the market during the quarter: (IDC issued R2.6bn, split between private placement and public issuance; Land Bank issued R1bn publically and DBSA issued R1.2bn publically at the tail-end of the quarter). Corporate issuance was dominated by the property companies (Redefine, Growthpoint, Premium Properties, Emira, Hyprop and Investec Property Fund). We also saw sizable volume from the automotive sector with Mercedes Benz and Toyota issuing a combined volume of R2.6bn. The remaining issuance activity came from Netcare, Calgro, Telkom and SuperGroup.

PERFORMANCE

For the quarter, the fund generated a return of 3.6% (net of fees), marginally underperforming its benchmark by -0.2%. For the 12 months ended 31 March 2019, the fund returned 2.7% (net of fees) while the benchmark returned 3.5% over the same period.

STRATEGY AND POSITIONING

The fund maintained its long duration positon over the quarter as we continue to view current valuations as cheap compared to our assessment of their long-term fair value.

The fund's credit exposure continues to fall in the absence of new fixedrate issuances to participate in. We continue to look for opportunities to add to the fund's credit holdings.