Fund review

The fund remained overweight in floating rate notes for the quarter, with a duration of one year and modified duration of 43 days. The fund increased in size during the quarter to R5.01 billion from R4.59 billion previously.

Market overview

For the quarter under review, the South African Reserve Bank’s (SARB) MPC committee left the repo rate unchanged at 6.50%. The votes to keep the repo rate unchanged were unanimous. Inflation has remained around the mid-point of the inflation target, printing 4.3% year-on-year in August. Inflation expectations have moderated. However, the downside risks to growth remain and, in most sectors, are a serious concern. Growth in world trade volumes continues to decline due to trade wars between the US and China. There are risks of oil price shocks which will filter through to the fuel price in SA.

The reasons detailed for keeping the repo rate unchanged were rand depreciation of 4.6% to the US dollar and a persistently uncertain environment. The SARB governor highlighted that the current challenges facing the SA economy are mostly structural and cannot be resolved by monetary policy alone. Structural reforms that raise growth and lower the cost structure of the economy remain urgent.

Looking ahead

The SARB adopted a wait-and-see stance as there are still concerns about Eskom’s restructuring, the Medium-Term Budget Statement (MTBS) which has been delayed by a week and Moody’s impending credit rating decision on SA, scheduled for 1 November. Depending on the Eskom restructuring model announced, a constructive MTBS and no downgrade from Moody’s, a further interest rate cut of 25 basis points is a possibility at the next MPC committee meeting, which is from 19 to 21 November.

The commentary gives the views of the portfolio manager at the time of writing. Any forecasts or commentary included in this document are not guaranteed to occur.

Fund review

The STANLIB Enhanced Yield Fund grew by R190 million to R4.69 billion during the first quarter of 2019. The fund remains overweight in floating rate notes with a modified duration of 1.2 years. The fund’s returns remain attractive compared with money market returns due to high yield assets in the portfolio.

Market overview

The repo rate remained unchanged at 6.75% at the first two Monetary Policy Committee (MPC) meetings for 2019. This was based on weak economic growth and lower inflation. The forward rate agreements (FRAs), used to speculate on borrowing costs, are trading flat with a downward trend at the tail end of the curve. The annual rate of inflation increased from 4%y/y in January 2019 to 4.1%y/y in February 2019, which was in line with expectations. Encouragingly, core consumer inflation remained unchanged at 4.4% in February 2019 for the fourth consecutive month, highlighting that the underlying level of SA inflation remains very subdued despite recent rand and oil price volatility. Consumer inflation is expected to be contained at 4.7% in 2019. Growth forecasts were revised down for the next three years based on the global slowdown, declines in business confidence, power cuts and growing pressure on household disposable income. Growth is now expected to be 1.3% for 2019, down from 1.7% in January and 1.8% in 2020. At the end of the quarter, Moody’s decided not to update SA’s credit ratings. This means that the local and foreign currency debt rating remained unchanged at investment grade (Baa3) with a stable outlook. S&P and Fitch both have SA on a sub-investment grade credit rating for local and foreign currency debt with a stable outlook.

Looking ahead

We expect the SA Reserve Bank will leave interest rates unchanged for the remainder of 2019 following the dovish tone of the committee at the MPC meeting in March. Over the medium term, the bank will continue to closely monitor international interest rate developments, especially in the US, developments within the agricultural sector, given that food inflation is off a very low base, and the impact of NERSA’s latest electricity price increase. Moody’s may wait till after the elections on 8 May to update its assessment of the country’s credit rating as this will reduce uncertainty about the economic and political outlook. The next designated rating action is scheduled for 1 November 2019.

The commentary gives the views of the portfolio manager at the time of writing. Any forecasts or commentary included in this document are not guaranteed to occur.

Fund review

The Stanlib Enhanced Yield Fund size grew from R 4.203bn in the second quarter of 2018, to R 4.273bn in the third quarter of 2018. As at the end of the quarter, money market rates closed off higher due to a weaker Rand. 12months NCD rates moved from 8.025% to its highs of 8.40%, with the latter levels last seen in 2015. 12months Jibar linked notes traded around 90bps over 3 month Jibar. The 3 month Jibar rate moved higher, from 6.958% to close off the quarter at 7.008%, taking direction from the movements in the NCD rates. Although our fund attribution remained overweight Jibar linkers, we managed to realize added value from the NCD purchases done in the long-end of the curve

Market overview

The market remained volatile during the quarter under review, as markets experienced large cash out flows due to recent developments in EM markets. The local currency depreciated to its highs of R15.53/$ aided by heighted global risk aversion towards EM markets. However, the local currency retreated towards the end of the quarter to close off at R14.12/$ as the USD weakened due to uncertainties around the trade tariffs agreements. The outcome of the quarter two GDP number that was released in the month of September, saw South Africa experiencing its first technical recession since the financial crisis in 2009. This resulted in the 2018 GDP number being revised lower from 1.2% to 0.7% as the economy is expected to remain under pressure. The 2018 inflation is expected to average 4.8%, as consumers are struggling to keep up with recent fuel hikes and VAT increases. Overall, the SARB remains concerned about keeping the inflation rate at the midpoint of the target range.

Looking ahead

While SARB left the repo rate unchanged at 6.50% at the September meeting, the votes were a close call with 3 of the members voting for a rate hike, while 4 members kept their view on hold. The monetary decisions that are to follow, will be closely monitored, more so as inflation is expected to edge closer to the upper end of the target band in 2019. The FRA’s are pricing in only an 11% probability of a 25bps hike at the November meeting, however with up to 50bps hike priced in, in a year’s time. October will be an important month as the Minister of Finance will deliver the MTBPS, while rating agency Moody’s is also expected to give their review on SA’s rating in the same month. The commentary gives the views of the portfolio manager at the time of writing. Any forecasts or commentary included in this document are not guaranteed to occur