Market review
During this quarter there were some surprising Monetary Policy Committee (MPC) rate decisions and no real significant local political events. Also quite significantly the economy emerged from the technical recession which it experienced during 2016Q4 (0.3% contraction) and 2017Q1 (0.6% contraction) by growing 2.5% in 2017Q2.

At the South African Reserve Bank (SARB)’s July MPC meeting it decided to cut the repo rate by 25 basis points (bps) from 7.0% to 6.75%, surprising most market participants. The decision was as a result of the SARB reducing its core CPI forecast for 2017 through 2019 down to below 5.0%. At the end of July Moody’s stated that the rate cut will likely support economic growth. More importantly, it also warned that the rate cut also signalled growing political pressure on the SARB, to which the market reacted negatively.

Following this, the SARB decided to keep the repo rate unchanged at the September MPC meeting, again surprising the majority of the market. Contrary to the SARB’s more hawkish stance, the market was more dovish and growth-oriented, considering that the economy just emerged out of a recession and that growth momentum is hard to pick up. The SARB stated that its assessment of the balance of risks to the inflation profile deteriorated from being ‘broadly balanced’ to ‘be somewhat on the upside’. The rand remains a key upside risk on continued vulnerability to political events, sovereign credit rating downgrades and a shift in global sentiment towards emerging markets. It is also at risk of faster than expected monetary policy normalisation in the major developed markets.

SA’s fiscal strength continued to weaken as reflected by increasing budget deficits. Finance Minister Gigaba announced that he would present the medium-term budget policy statement (MTBPS) in Parliament on 25 October 2017. This will provide an updated forecast of fiscal slippage and will outline National Treasury’s response in terms of possible tax increases and expenditure cuts.

On the local political front the unsuccessful vote of no confidence by secret ballot against President Zuma and the rejection of the Public Protector’s attempt to change the SARB’s constitutional mandate were of some significance.

In the US, the Federal Reserve left rates unchanged over the quarter as a consequence of soft inflation and weak labour market conditions. During September the ongoing conflict between the US and North Korea and the extreme weather weighed against the dollar, providing support for emerging market currencies. With these events subsiding and the August US inflation printing 1.9% (up from 1.7%), the dollar rallied strongly towards the end of the month. The Fed also indicated that it will start its balance sheet reduction, but it will be done in a gradual manner with no active sales, just maturity run-offs.

CPI year-on-year (y/y) in August improved to 4.8% from 5.1% in June. PPI y/y weakened to 4.2% in August from 4.0% in June. The rand/US dollar exchange rate weakened to 13.54 from 13.06 during the quarter. The 10-year SA government bond strengthened to 8.69% from 8.87% over the quarter. The trade balance declined to R5.94 billion in August from R10.56 billion in June.

The money market yield curve shifted down over the quarter as a result of the surprising 25 bps rate cut in July. It also flattened somewhat because the market is pricing in a further rate cut. the market is pricing in a further rate cut.

What SIM did
All maturities were invested across the money market yield curve, exploiting the term premium. Quality corporate credit, which traded above the three-month JIBAR rates, was added to the portfolio. We preferred a combination of floating rate notes (FRNs) in the portfolio together with some fixed-rate negotiable certificates of deposit (NCDs). The combination of corporate credit, high-yielding NCDs and FRNs will enhance portfolio returns.
SIM strategy
Our preferred investments would be a combination of fixed-rate notes, floating rate notes and quality corporate credit to enhance returns in the portfolio. We are taking a balanced approach between fixed and floating instruments, considering current relative valuation, also that there could still be a rate cut or two, and the upside risk to the inflation profile.

Market review This quarter started off on a negative note with fraud accusations against Finance Minister Pravin Gordhan and the so-called ‘state capture’, which accordingly had a substantial negative impact on the financial markets.

During its medium-term budget speech in October the National Treasury announced a lower expected growth rate of 0.5% for 2016 and a moderate recovery thereafter. It also stated an objective of stabilising the debt/GDP ratio at 47.9% over the next three years. Subsequently, actual GDP growth for 3Q2016 was recorded at 0.2%, a bit lower than the 0.5% that was expected by the market.

November was dominated by the surprising US election victory by Donald Trump. Initially the market showed no reaction to Trump’s victory but in the few days that followed, a sell-off in the global bond markets ensued because of expectations of higher growth and inflation, as well as a steeper interest rate trajectory there.

End-November Moody’s and Fitch kept SA’s foreign credit rating two and one levels respectively above junk status and early December S&P kept it one level above.

Non-OPEC oil-producing countries agreed to cut their daily oil production by 558 000 barrels for the first time since 2001. Agreements with OPEC and non-OPEC members contributed to a 17% increase in the oil price this quarter. Mid-December the Federal Reserve (Fed) raised its benchmark interest rate by 25bps.

The year-on-year CPI weakened from 6.1% in September to 6.6% in November and PPI from 6.6% to 6.9%. The rand amazingly/coincidentally opened and closed at 13.73 for the quarter. The 10-year SA government bond yield weakened from 8.67% to 8.92% and the equity market as measured by the FTSE/JSE All Share Index returned -2.5%.

The money market yield curve on the short end (up to one year) remained roughly unchanged, albeit dipping slightly on the long end.

What SIM did
All maturities were invested across the money market yield curve, keeping the duration of the portfolio close to the maximum of 90 days. Quality corporate credit, which traded above the three-month JIBAR rates, was added to the portfolio. During the quarter, we preferred a combination of floating rate notes (FRNs) in the portfolio together with some fixed-rate negotiable certificates of deposits (NCDs). The combination of corporate credit, NCDs and FRNs will enhance portfolio returns.

SIM strategy
Our preferred investments would be a combination of fixed-rate notes, FRNs and quality corporate credit to enhance returns in the portfolio. The money market yield curve is still steep and we will continue to make use of the curvature by maximising term and duration in the portfolio.