While the first two quarters of the year were dominated by the Rand on a generally strengthening trend, the third quarter saw the Rand consolidate and indeed weaken slightly. The primary reason was the US Dollar staging a comeback from oversold levels, after a weak start to 2017. The Rand weakened from R13.06 in June to R13.55 at end September.

The other major factor in Q3 was that the Equity market staged a solid comeback with the SWIX index delivering 7%; driven by a strong performance from the Resource sector at 17.7%. The only asset class to deliver a better return was MSCI World at 8.3% (the Rand provided 3.7% of that return). Our exposures to EM and Europe (where permissible) have provided a useful contribution to the portfolio return.

Globally, in addition to strong equity returns, the commodity index provided good returns and the Bond market also played ball. The general performance was for a strong third quarter globally. On the domestic news front, the SARB provided most of the market impetus.

1. First, as we expected, the SARB cut the benchmark interest rates by 0.25% in the July meeting which assisted our Bond positions and our interest rate sensitive equity positions. This was a surprise to the consensus of economists. 2. Again, in the September meeting; the SARB surprised the market by not cutting rates, citing the risks to the inflations view by an uncertain political environment. We remain of the view that further cuts will be delivered, but the SARB is proceeding cautiously. The weakness in the Rand in September has supported the SARB view, but the transmission mechanism into inflation by the weaker Rand is not strong. 3. Politics continue to dominate the news with the ANC elective conference in December delivering a degree of uncertainty to the market. Consensus is switching more towards a benign outcome, although this is still highly uncertain.

For the first three quarters of 2017 the returns for the asset classes have been inflation beating, driven in the main in the last quarter. We continue to monitor the market for opportunities while recognizing that the fourth quarter is seasonally very strong for markets, but rest assured we monitor our risk positions very actively, in order to deliver inflation beating returns for our clients.

Last quarter we wrote that the key driver of SA asset markets coming into the year had been the strong Rand. The second quarter saw a broad continuation of the Rand’s fortunes dominating local asset market gyrations.

Against the US Dollar, the Rand opened the quarter at R13.41, weakened to R13.95 (as it was still suffering from the after-effects of the late-March cabinet reshuffle), rallied to R12.56 and weakened in the last two weeks of June to close the quarter at R13.07.

All major local asset classes returned less than cash so in domestic assets it certainly paid to be defensively positioned. During the first half of this year we have generally preferred to take equity risk globally rather than domestically and this paid off over the period.

Globally, the cyclical expansion certainly paused over the period. Commodities were generally weak, despite the weaker US Dollar; major bond market yields stayed low despite the start-of-the-year consensus that bond yields would rise; developed world 10-year inflation expectations drifted lower as well. However, global equity markets broadly powered ahead.

Domestically, significant news came in the form of confirmation that SA was in technical recession with negative real growth over 4Q 16 and 1Q 17. This significant for two reasons: 1. Typically, South Africa’s GDP cycle reflects that of the global economy as we are a relatively open economy. This time our GDP is slowing at a time when the globe is expanding, suggesting that this recession is of our own doing. 2. We have for some time been highlighting that we expected this year to see downside inflation surprises with interest rate cuts to follow. The inflation surprises have started and after some reflection on the risk of further sovereign downgrades we maintain the view that interest rates will be cut here in the near future. At the right prices, we are happy holders of bonds and rate sensitive stocks to capitalize on this view.

Fund performance has been satisfactory and our positive global cyclical stance has been proven correct, however this is cold comfort as in absolute terms we always strive to generate cashbeating returns in the short term and inflation-beating returns over periods 3 years and longer. The backing up of bond yields could provide some volatility during the coming quarter which should provide opportunities for us.

The fund changed sectors from South African--Multi Asset--High Equity to South African--Multi Asset--Medium Equity on 01 Mar 2016. The Fund lost part of its history.

The portfolio shall be a specialist portfolio and shall aim to achieve capital growth, as well as some
level of capital protection over the long-term. In the short-term the portfolio shall aim to profit from a
rising equity market and protect investors against capital losses in a weak equity market.

In order to achieve this objective, the portfolio will from time to time be invested in equity securities
and/or non-equity securities to the maximum level permitted by the Act that will comply with
prudential investment guidelines for retirement portfolios.

The manager may from time to time invest in participatory interests or any other form of participation in portfolios of collective investment schemes or other similar collective investment schemes as the Act may allow from time to time, and which are consistent with the portfolio’s investment policy. The manager will use a quantitative risk management model when selecting the securities that will be included in the
portfolio. The model shall incrementally switch exposure from equities to non-equity instruments if
the portfolio value drops towards a predetermined "protective floor".

Outside of US equity, 2016 saw poor returns in global equity markets, South Africa included. The key local trend was that of a stronger Rand and stronger bonds. However, those two moves seem largely behind us.

2017 brings the prospect of a welcome bit of reflation, but not enough to bury the global secular disinflationary forces of deleveraging and ageing demographics. This year we see a world where the weak expansionary cycle could be extended for two reasons: one, the prospect of fiscal policy taking over the baton from monetary policy, and two, the fact that expectations and confidence for future growth improved dramatically towards the end of 2016. After all, a positive outlook is required for people and corporates to hire, spend, invest or borrow. So our base case is for more of the same in terms of economic growth, but not a return to the debt-fueled growth rates seen before 2008. On average, then, the global backdrop is not going to be strong enough to support a major new bull market in risk assets. So in financial markets we also expect more of the same, bearing in mind that there have in fact been good returns to be had if one had been actively allocating between different asset classes and currencies. This is not a buy-and-hold world.

Around the base case, however, tail risks have definitely gone up. 2017 will see big turning points in both fiscal and monetary policy, and turning points are often messy, volatile affairs as the markets will change their minds from one week/month/quarter to the next as to whether the changes are warranted or whether they might work. So expect volatility, especially equity market volatility to pick up. We continue to live in a world that is being kept afloat by experimental policy, not to mention increasingly unpredictable policymakers.

The other source of elevated tail risks stems from moving into a world where the US is no longer going to be showing global leadership. This opens the door to other nations stepping into the breach and flexing their muscles. This could in fact sow the seeds for heightened volatility for years to come. But rest assured that when you’re invested with a truly active manager, volatility provides massive opportunities.