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

Against the US Dollar, the Namibian Dollar opened the quarter at N$13.41, weakened to N$13.95 (as it was still suffering from the after-effects of the late-March cabinet reshuffle), rallied to N$12.56 and weakened in the last two weeks of June to close the quarter at N$13.07.

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 and Namibia were both 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 SA GDP is slowing at a time when the globe is expanding, suggesting that this recession is of its 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.