Namibia’s economy
The third quarter of 2017 marked the ten year anniversary of the start of the global financial crisis, generally agreed to have started during August 2007 with a series of credit shocks and leading to an international banking crisis. The economic downturn that followed was one of the worst recessions in decades in many global economies. Since then, global growth levels have recovered to historical norms albeit below trend growth levels, while global trade has remained below pre-crisis levels. The higher growth rates have not been accompanied by higher inflation despite the expansionary monetary policy measures being implemented as wage growth has remained sluggish while corporate profits continued to rise. This has helped fuel political instability in many major economies worldwide.Taking a look at the third quarter of 2017 it was marked by strong performance and new all-time highs in global equity markets, with volatility measures still at all-time lows despite geopolitical tensions and the threat of central bank normalization looming. On the local front we’ve also seen the NSX Local Index continuing on its upward walk reaching a new all-time high and with our dual listed included NSX Overall index only 2% from the previous all-time close in May 2015.

The Namibia Statistics Agency released the final 2016 Annual National Accounts recently which revised the prior year’s numbers, amongst others including an upward revision to the 2016 GDP Growth numbers to 1.1% from 0.2%. Even with the upward adjustment, the growth rate remains under pressure and is quite a bit below our historic levels and the numbers a developing market ideally should strive for. The second quarter numbers released during September confirmed this and the NSA reported a GDP contraction of 1.7% year on year for the second quarter showing that we’re still stuck in the technical recession. Unfortunately, also during this quarter, Moody has come out and downgraded our foreign and local currency sovereign credit rating to Ba1 from Baa3, putting us one bracket below “investment grade”. This change has brought Moody’s rating of Namibia to one bracket below that of Fitch which is at BBB-. Moody has also kept its negative outlook on these ratings and noted there will have to be looked at the following three items; firstly the worrying fiscal imbalances combined with an increasing government debt levels, secondly the limited institutional capacity to manage shocks and solve the longer term structural fiscal rigidities and lastly the risk of further government liquidity pressure in coming years.

The Bank of Namibia lowered the benchmark lending rate to 6.75% during August in attempt to support growth while maintaining the one to one link between the Namibian Dollar to the Rand. This was the first rate cut in Namibia since 2012 when the Repo Rate turned at the 5.5% level. The cut came shortly after the South African Reserve Bank’s Monetary Policy Committee cut the South African Repo Rate by 25 basis points to 6.75%, citing a drop in their outlook on the inflation figures as the main driver for the drop. This seems to be the start of an interest rate cutting cycle. Albeit gradual and measured, we see the markets pricing in another 25 to 50 basis cut in the shorter term.

After the peak inflation number we’ve seen in January when the CPI year on year was at 8.2% after which it changed direction and been on a steady decline in 2017 to the 5.4% level recorded in July and August and then with a slight uptick at the quarter end to 5.6%. The South African inflation has been on the same trajectory for the 2017 year and has been within the 3-6% band SARB inflation target since April this year.

The benchmark Namibian 10 year government bond yield declined slightly during the last quarter when it dropped from 10.66% in June to 10.44% as at the end of September, helping this drop in yields was the narrowing of the spreads we’ve been seeing for Namibian bonds trading over their South African counterparts. During 2017 the primary market bond auctions was well supported with the last quarters auctions receiving at least double the amount of bids as bonds on offer from the Bank of Namibia. This has helped to narrow the average spread on our bonds at the belly of the curve, GC25 to GC32, to an average spread of 1.48% down from around an average of 2% we were seeing up to June this year. With the more predictable issuing program from the Bank of Namibia and regulatory changes, we expect these spreads narrow even further when the expected first domestic holding requirement kicks in for pension and insurance fund money at the end of the year.

Market review
It was quite an active quarter on the NSX where we had two new listings on the local board when Letshego and Nimbus held successful capital raising programs and can now be actively bought and sold on the local bourse. Also on the bond side we’ve seen successful bond issuances not only from the Bank of Namibian side but also the Development Bank of Namibia which raised N$ 291 mil and Bank Windhoek raised N$ 200 mil during August, with Oryx and others looking to raise debt during the last quarter it’s definitely a busy end to the 2017 year.

Even with quite a bit of negative sentiment on the South African market the JSE has done very well the last quarter, reaching an all-time high for the All Share index and rewarding investors with the best returns over a 3 month period so far this year. The FTSE/JSE Top 40 index delivered a 15.3% return supported by strong performance in the media and resource sectors. These returns we’re also seen on the Namibian Stock Exchange market where the South African dual listed shares helped push up the NSX Overall Index to 13.2% for the 3rd quarter. The locally listed shares also did well with the likes of Nambrews up 11.8% and Letshego up 6.6% pushing the NSX Local Index up 5.7% for the quarter.

The bonds also delivered a positive return this month as we saw the Namibian yield curve coming down especially around the shorter and middle end of the curve. We can see this coming through nicely on the return numbers where the IJG ALBI index delivered a total return of 4.7% for the quarter and already up over 10% for the year to date returns. T

he stronger demand we’re seeing on the government bond issuing and subsequent narrowing of the spreads can also be seen on the Namibian Money market instruments. The government Treasury bill yield has dropped quite a bit with the 360 day yield dropping from around 8.6% to 7.9%, the local banks has also seen lower yields when the NCD ratesover same period dropped from 8.6% to 8.0%. This means investors are willing to lend money at a lower rate to institutions and that these entities are getting financing at a lower rate than before.

Investment strategy
In August we changed our view on the potential returns from bonds over the next six and 12 months. We increased the real returns required from bonds from 2% to 3%. The higher risk premium is driven by high political risk seen in the South African Market in the short term and a deteriorating fiscal position in the medium term from both South Africa and Namibia. Even though we’re still positive around the real return, which is in excess of 2% on offer in the Namibian bond space, we have used the opportunities available due higher demand in the market to lighten our bond exposure in the portfolio. On the portfolio level and from a house view perspective we’re still overweight bonds to cash on our local portfolios.

With the drop in the yield curve on shorter money market instruments we’ve seen the cash instruments performing exceptionally well with the cash instruments delivering a 2.1% return for the quarter and up over 8.5% for the last 12 months.

We remain neutral on the local and dual listed equities in the portfolio and have not changed on our investment strategy to favour the locally listed shares rather than the dual listed shares listed on the NSX. This has meant our equity performance is slightly lagging the benchmark in short term due to the exceptional performance of the JSE dual listed shares but we still believe there is value in the local shares and with the re-ratings in prices happening less often we’re comfortable to hold on to the shares for now.

The fund invests in a wide spectrum in investments available in Namibia making use
of the Namibian equity, bonds, listed property and money market instruments in
order to maximise total returns over the long term. The Fund is suited for investors
requiring capital growth via balanced portfolio with exposure only to Namibian
instruments.

Market review
Following on the slowdown we’ve seen in the growth outlook for Southern Africa, the Minister of Finance revised his growth expectation, as communicated during the mid-term budget speech, where for 2016 to only 0.5% projected with some moderate growth in 2017 and onwards. However, with the third quarter GDP reported at -1% following the 1.5% retraction seen in the second quarter means we’re moving into the recession area at a time international rating agencies are keeping a close watch as to what is happening in Southern Africa. Namibia’s current investment grade isBBB by Fitch and Baa3 by Moody’s , but now both rating agencies have a negative outlook quoted in part due to reduction in GDP growth for 2016 and the significantly increased risk of wider deficits and rising debt over the medium term.

After the sharp jump in January, we’ve seen inflation steadily picking up for the year with the December inflation coming in at 7.3%. This is quite a gap from the 3.7% recorded 12 months ago and the outlook being that inflation will remain around the 6.1% per annum for the 2017 period.

With several major mining and infrastructure projects coming to completion, as well as government suspending several of its construction projects to try and dampen the rising public debt, some positive news on both the drought conditions and weak commodity prices for 2017, will not only improve our growth outlook for Namibia, but also lighten our spirits
Portfolio changes and performance
During December, we increased our exposure to Inflation Linked Bonds in our House View as the 10 year yield in SA weakened to about 2% which is quite an attractive yield. On the Namibian side we saw during the primary auction in November that our two ILB bonds GI22 and GI25 traded at a yield of 3.94% and 4.07% respectively. With the increases in inflation we’re seeing and the premium over SA yields, the instruments continue to look well priced and the fund maintains the overweight position held on Inflation Linked Bonds.

The local market continues to have a positive 2016 year and the All Namibian Fund delivered a net retail return of 11.5% and 1% for the last quarter. On the equity side, the NSX Local Index returned 15.1% for the 12 months and 0.6% for the last quarter of 2016. Whereas the dual listed shares had an exceptional year with the 12 months return for the NSX Overall Index standing at 27.8%. In large part, the great returns of the dual listed shares was driven by Anglo-America which returned an excess of 180% for 2016 and represents around 21% of the Overall Index. With the funds’ overweight positon to the local listed shares, we have missed out on some of the equity returns. However, we still see the local shares well priced and in the case that the dual listed shares possibly moves down with the more volatile SA equities, the fund has some protection in the form of the lower volatile local shares.

We’re still managing the bond duration of the fund to be shorter than that of the SA All Bond Index, while closer to the duration of the shorter IJG Nam Bond Index. This helped on the outperformance over the last year where we saw the spreads widen on the Namibian bonds between 30 and 50bps, where the portfolio managed to deliver a 12.8% return on the bonds whereas the index only returned 11.7%. Cash continues to perform well with the Namibian cash instruments delivering a solid return of over 8% compared to the IJG Money Market Index of 7.62% for the period.

Outlook
During 2016 we saw quite a drop in the markets’ appetite for government debt, particularly at the longer end of the curve. With government pushing the annual debt growth to 33.5% y/y (to around 40% of GDP) there has been a large supply of debt coming to the market in 2016 with the impact being spreads widening and primary auction subscription levels dropping materially from 2015. Until more clarity is received from government in 2017 regarding the expected debt to be raised and proposals to change regulations around domestic holding requirements, we’re keeping an underweight position on the nominal bonds and rather an overweight position on the lower volatile inflation hedged Namibian Inflation Linked bonds.