Currency volatility has been rising since the middle of 2014 as we saw the US Dollar embark on a strengthening path against most currencies in the world. The rise of the Dollar had a profound effect on asset classes like commodity prices, emerging market currencies and on the forecasts for global inflation and growth. From a SA perspective the Dollar has made a substantial impact on a few economic fronts. Firstly, there was the impact through a wide range of lower commodity prices. The fall in SA's export commodity prices like iron ore and coal were countered by the lower import price of crude oil which was beneficial to the SA consumer and the likes of large diesel users like Eskom. Secondly, there was the inflation impact. Although the Rand weakened against the Dollar it actually maintained a steady profile on a trade weighted basis against the currencies of our largest trading partners. Thus the inflation impact from Rand weakness will be muted. At the moment it is a Dollar theme driven market sentiment.

Globally inflation and growth remain at muted levels, with various central banks across the globe easing monetary policy further in 2015. The European Central Bank finally implemented a much anticipated quantitative easing programme at the beginning of March. The US Federal Reserve is the only developed market central bank that has opened the door for increasing interest rates for the first time after the financial crises of 2008. This has been the main reason for the volatility and higher risk premiums in emerging markets linked to the US Dollar interest rate cycle. SA is linked to the US interest rate cycle, due to the fact that SA has much more offshore debt in Dollars than in any other currency.

Locally the fundamental drivers for growth have been weakening and the outlook for inflation has changed. Regulatory changes in the form of higher taxes in the budget and expected higher electricity tariffs will lead to higher administered price inflation, coupled with higher food prices, which leads to a change in the expected path of consumer inflation. This sentiment was echoed by the SARB MPC in its last statement, expressing a more negative view on consumer inflation over the next 12 to 18 months.

Fixed income markets have been volatile in the wake of the rising Dollar. The SA 10 year bond traded between 7% and 8% in a short space of time as the fixed income market took its cue from the volatility in the currency markets. Issuance in the long dated bond market is still dominated by government and SOE paper. Issuance of short and medium dated corporate credit remains muted during this quarter and was mainly limited to refinancing transactions from the major banks in SA. Corporates in SA have healthy balance sheets at present and are reluctant to borrow in the markets at elevated spread levels. This situation will unwind over a period of time as corporates need more funding and bank funding becomes more unattractive with the further implementation of bank capital restrictions.

With the implementation of further legislation on bank capital (Basel 3) in January 2015, we see banks willing to increase the duration of their funding books and pay higher yields on their longer dated NCD's. We continue to selectively use this opportunity to lock in higher real yields for the Fund at a low risk of default. Currently longer dated bank NCD's look attractive, given the expected path of inflation and a protracted interest rate hiking cycle. We will continue to deploy cash when real yields are attractive given the level of risk.

The PSG Optimal Income Fund will change it's name to PSG Diversified Income Fund, effective from 11 February 2015