Market review
The Monetary Policy Committee (MPC) of the South African Reserve Bank increased the repo rate twice during the past quarter. On 28 January the repo rate was increased from 6.25% to 6.75% and on 17 March with another 25 bps to 7%. The combined impact of the drought and weak currency on inflation was cited as the main contributing factors. The next meeting will be on 19 May 2016, with another increase a possibility.

The local currency, as measured against the US dollar (USDZAR) recovered somewhat during the quarter from 15.487 at the end of December 2015 to 14.692 at the end of March 2016. The favourable budget Mr Pravin Gordhan presented in February, as well as the more benign international economic conditions, supported the rand.

Inflation increased from 4.8% to 7.0% during the quarter, well outside of the target range of the SARB of 3% to 6%. Outlook for inflation going forward is weak, especially due to the fluctuating rand and the anticipated impact of the drought on especially food prices, vindicating the past increases of the repo rate.

The money market yield curve flattened after the two rate hikes of 75 bps in total. The short end increased by 74 bps to 6.77%, but the 12-month JIBAR increased with only 16 bps to 8.59%.The market is pricing in more increases, but that will be data dependent, especially from the international markets.

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 3-month JIBAR rates, was added to the portfolio. During the quarter, we preferred a combination of floating rate notes (FRN’s) in the portfolio, together with some fixed rate negotiable certificates of deposit (NCDs). The combination of corporate credit, negotiable certificates of deposit and floating rate notes 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. 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.