Market review

The first quarter of 2019 saw a bit of a roller coaster ride for the South African Rand, again being impacted by a mixture of local and global events. The money markets followed suit, but in a more contained way. The three-year deposit rate would have moved sideways only, was it not for the short spike around the budget. The main drivers of the mentioned events are discussed below.

In the local markets, the currency and short-term rates were influenced by a number of political events. The markets reacted positively on the State of the Nation address by President Cyril Ramaphosa, but quite badly on the National Budget. The budget per se was okay, but it was the acknowledgement that Eskom is indeed in a bad state and needs fiscal money to be bailed out that caused the damage. The Phase 4 rolling blackouts which followed in March confirmed our worst fear. However, Eskom is an engineering problem, which in all probability will and can be sorted out. In fact, this is also the opinion of Moody’s, which keeps on cutting us slack in keeping South Africa from junk states. This positiveness is then captured in the shorter money market interest rates, which saw a downward trend over the quarter.

On the international front, we saw a rally in Emerging Markets during January - somewhat on the back of the US Federal Reserve (Fed) which has now firmly abandoned their programme of interest rate hikes. They still use the words ‘data dependent’, but talks of a cut has appeared. Furthermore, the trade war between China and the US continues to subside. The Rand/US Dollar exchange rate was therefore still volatile during the quarter, fluctuating between 13.31 and 14.58.

During the quarter the local CPI decreased slightly, with inflation figures for the past three months respectively at 4.5%, 4% and 4.1%. This was predominantly on the back of the decrease in fuel prices. The lower inflation expectations, both locally and internationally, have then influenced the money market yield curve lower. However, with fuel costs spiralling upward, inflation pressure will mount - its impact on the short rates to be seen in time.

From a credit perspective, there were no negative surprises in the quarter, although the newspapers carry some news on liquidity pressure in the property sector as well as one or two other names. The lack of suitable credit due to South Africa Inc. not borrowing is still driving credit spreads lower. We again managed to add some credit, and kept on investing in other yield- and duration-enhancing products.

What SIM did

All maturities were invested across the money market yield curve, making full use of the term premium. Quality corporate credit, which traded above the three-month JIBAR rate, was added to the portfolio. We invested mostly in floating rate notes (FRNs) as the flatter yield curve provided little or no compensation for investing in fixed-rate bank instruments - only the odd fixed corporate bond was added. The combination of corporate credit, existing higher yielding negotiable certificates of deposit and FRNs will enhance portfolio returns.

SIM strategy

In order to provide an enhanced return in the portfolios, our preferred investments would be a combination of fixed rate notes, FRNs and quality corporate credit. Fixed-rate instruments will be purchased when they provide value, keeping within the duration limits of the portfolios