Fund review

The size of the Standard Bank Namibia Income Fund decreased from N$818 million to end the third quarter at N$608 million. Returns in the fund look attractive compared to money market returns despite the defensive positioning, due to investments in high yielding securities. The Fund’s modified duration was reduced to 0.26 years from 0.32 years as volatility in the markets remained. . The volatility in the markets which came as a result of emerging market jitters left investors to seek diversification into income funds. The Fund’s returns remain attractive compared to money market returns due to high yield assets in the portfolio. Credit spreads continued to tighten during the quarter, further benefiting the portfolio.

Market overview

Emerging market currencies and assets continued to sell off in the third quarter amid a stronger US dollar environment as trade and geopolitical tensions heightened, monetary conditions continued to tighten and global inflation expectations accelerated. Risk aversion due to US sanctions on Turkey and Russia, the debt crisis in Argentina contributed to the rand weakening by 3% against the US dollar, with bonds following suit as foreign investors sold R16bn of South African government bonds in the quarter. The US Fed raised interest rates by 25bps in September as widely expected, and indicated that they are planning on raising rates once more this year and three more times in 2019 as growth remains robust and inflation continues to increase.

Local GDP surprised by contracting again in the second quarter, tipping the economy into a technical recession and sparking fears of a possible ratings downgrade by Moody’s on the 12th of October. Longer dated bonds sold off as a result, as markets were pricing in a higher probability of an increase in government bond issuance as tax revenue was likely to come under pressure. The spread between the 30 year maturity bond and the 10 year maturity bond increased by 10 basis points to end the quarter at 93 basis points, reflecting these risks. Headline Inflation increased from 4.4% to 4.9% in August due to higher fuel prices and higher VAT but core inflation remains subdued as the economic activity remains subdued. The Reserve Bank as a result left interest rates unchanged leaving the markets pricing in higher probabilities of an interest rate hike at their November meeting should the current negative environment persist.

Looking ahead

The fourth quarter comes with a number of event risks with possible significant impact on returns

Fund review
The size of the Standard Bank Namibia Income Fund increased by N$37m, to N$836m, in the first quarter of 2018. Returns in the fund are attractive compared to money market returns despite the defensive positioning, due to investments in high yielding securities. The fund’s modified duration remained defensive at 0.25 years.

Looking Ahead
The bond markets continued on its recovery path which started in December post the elective conference of the ruling party, which saw the currency strengthening as the new leadership is seen as market friendly. The All Bond Index returned 8.06% during the quarter, taking the 12 month return to print 16.23%. The 10 year maturity bond yield opened the quarter at 8.59% and ended the quarter at 7.98%. The variation of returns in the All Bond Index was largely explained by the performance of the long end of the yield curve with the 12+ sector, which is 60% of the index, returning 10.03% in response to an aggressive flattening of the yield curve. The quarter’s performance was driven by a lot of positive sentiment on South Africa specific issues, which saw foreign investors in the bond market continue to increase their holdings by R18 billion over the quarter. The decline in yield occurred despite a selloff in US treasuries which came as a result of a strong economy and wage inflation showing signs of increasing, which led to the Fed increasing short term interest rates by 25 basis points. The disconnect with the US treasuries is a clear reflection of how intense the effect of the euphoric sentiment had on South African markets. The credit default swap spread for the country also declined and touched a low of 140 basis points before tracking back to 160 basis points which is where it started the quarter. Further adding to positives, the budget statement in February was positive for the market as national treasury revised the debt trajectory to be much lower than what was forecast in the medium term budget statement. The revisions led to rating agency Moody’s not downgrading the country to below investment grade, which would have led to the country’s local currency debt being kicked out of the WGBI (World Government Bond Index). Instead, they changed the outlook from negative to stable, which now buys the country more time to turn the economy around due to the positive credibility the new leaders have.

The South African Reserve bank cut interest rates by 25 basis points at the March MPC meeting taking the repo rate to 6.5% in response to a benign inflation environment which saw inflation printing 4.0%, a number last seen in the first quarter of 2015. The strong rand, the positive political backdrop and declining volatility still leaves room for a possible rate some sometime during the current year, as inflation expectations have also declined