For the quarter under review The South Africa Reserve Bank monetary policy committee kept the repo rate unchanged, this was in line with market expectations. Inflation returned to within the target range at 5.4% y/y for May, and has been surprising to the downside. The Bank has acknowledged the improvement in inflation and a positive trade balance; however the Bank remains cautious about further possible adverse shocks- being a highly sensitive rand to unfolding domestic political uncertainty, as well as decisions by the credit ratings agencies.

Moodys announced their rating decision in June, they downgraded South Africa sovereign rating by one notch with a negative outlook. Political uncertainty, rating agencies downgrades and a very weak first quarter GDP number, which technically puts South African in a recession, caused market volatility over the last quarter.

Due to inflation printing better than expected and weak GDP numbers the market has started to price in the possibility of future rate cuts. The forward rate agreement market is pricing in the possibility of a 50 basis points rate cut in a years’ time. One year NCD rate closed June month end at 8.125%, down from March month end at 8.325%.

The South African economy and the rand however remains vulnerable to a number of events that are expected to play out in the latter half of 2017, due to the high uncertainty the money market funds remain overweight in floating rate notes.

The investment objective of the portfolio is to maximise the current level of income within the
restrictions set out in the investment policy, while providing maximum stability of capital. The
portfolio will aim to achieve performance returns in excess of money market yields and current
account yields.
The portfolio will invest its assets in South African markets at all times and will be permitted to
invest in a flexible mix of non-equity securities, including but not limited to money market
instruments, bonds, fixed deposits, listed debentures, preference shares and other high yielding
securities, as well as any other securities which may be approved by the Registrar from time to
time and which are consistent with the investment policy of the portfolio, to the maximum levels
permitted by the Collective Investment Schemes Control Act, No. 45 of 2002, and the Regulations
thereto, as amended from time to time. In respect of the flexible nature of this portfolio, the portfolio
may thus be fully invested in any of the above-mentioned asset classes at any particular time,
while complying with the stated duration and tenor limitations.

The South African repurchase rate remained flat at 7.0% during the last quarter of 2016, with the prime lending rate at 10.5%. According to the MPC statement, the decision to keep rates unchanged was unanimous. The MPC retained the view that SA may be close to the end of the hiking cycle. The domestic growth outlook also remained unchanged and remains constrained against the backdrop of weak business and consumer confidence. SA consumer inflation rose to 6.6% year-on-year in November, following a 6.4% increase in October. This was in line with market expectations. Inflation is expected to moderate meaningfully in 2017, due to a slowdown in food inflation as well as favourable base effects.
The South African sovereign credit rating was reviewed by Fitch and Moody’s at the end of November and a week later by S&P. The ratings were broadly unchanged, with Moody’s affirming the long-term counterparty rating at Baa2, with a negative outlook. Fitch also affirmed its long-term global scale rating at BBB-, while lowering the outlook to negative from stable.

S&P affirmed the foreign currency rating at BBB-, but lowered the local currency rating by one notch to BBB from BBB+, reducing the gap between the local and global scale ratings. The risk of a downgrade to "junk status" has therefore risen and South Africa will require political stability and better economic growth in order to avoid a downgrade.

The Federal Reserve hiked US interest by 25 basis points, as expected, in December but also revised its expectations for 2017 from two to three further hikes. The expected increase in US interest rates against a background of a projected decrease in SA inflation in 2017, makes it likely that SA interest rates will remain flat during 2017.

One year NCD rates closed at 8.4% and 3 month JIBAR at 7.36% in December, remaining fairly flat during the fourth quarter of 2016. The forward rate agreement (FRA) curve, used to speculate on borrowing costs, was trading flat at the end of 2016 indicating no expectations of an interest rate hike during the first quarter of 2017. This also conforms to our current view of flat interest rates for 2017. Currently there is still value in JIBAR linked instruments.