It was an eventful month and an eventful quarter. As expected (and discussed in our January factsheet), 1Q16 revolved mostly around ongoing slack in the global economy and the Fed..s assessment of both the domestic and the global backdrop. Most eyes were fixed on China and the ongoing risks to the global economy of a large devaluation. Oil prices fluctuated and it led to periods of strong over and underperformance for risky (emerging market) assets.

On the local side politics continued to dominate. A disappointing State of the Nation address (more promises of ..the time has come to do things differently......was followed by an on-paper promising National Budget but remaining question marks about the implementability thereof. Market reaction to the Budget seemed to suggest that there is a growing trust deficit between policy makers and investors. This view naturally has led to the bond curve remaining steep and growing concerns about inflation fears, higher interest rates and a further weakening of the exchange rate.

Somewhat surprisingly, after a shock reaction to Nenegate, equities and especially interest rate sensitive counters have managed to stage a meaningful comeback from the December lows, and importantly have not shown any sign of retesting worst levels witnessed during December 2015. And to be fair, the volatility experienced in both the rand and bonds year to date has been more than justified, although tricky to navigate! The governing party continues to hobble from one crisis to the next, with the President already having warded off more than one call to remove him from office. Despite a ruling of wrongdoing on Nkandla by the ConCourt and impeachment procedures by the opposition, the ANC appears set to push forward with keeping Zuma in office at least until after the local elections, set for 3 August 2016. Voices of discontent in the party continues to grow and it will be interesting to see whether this will have a stabilising or destabilising effect as the election draws closer. Importantly, strike season is approaching with some reports of violence already surfacing.
Against this backdrop rating agencies are expected to comment on the sovereign in coming weeks. Both Moody..s and S&P visited the country over the past month, and from our interactions with both it seems a tall order for South Africa to avoid further downgrades in June. Pressure on the Finance Minister continues to grow in terms of announcements of reform and PPP initiatives. Some headlines are starting to surface (SAA, Eskom) and encouragingly there might also be a chance that South Africa..s nuclear ambitions are put on hold for the while being.

While headlines have been light on internal battles between ANC factions, we have learned not to take this for granted. Although the heat on so-called state-capturing, rent-extracting players are on the rise, the battle is far from won.

In such an uncertain environment we prefer to remain close to shore with regards to risk-taking. The portfolio has performed well despite extreme volatility. Focus remains on avoiding low-quality credit. The volatility in the rand and two-sided risks to the unit has kept us from increasing our offshore exposure for the time being. We have lightened exposure to the listed property sector over the quarter after yet another blowout performance for some counters. The fund is currently running very low duration (the lowest for some time) and remains fairly liquid. We expect the Reserve Bank to continue to frontload interest rate hikes (pencilling in at least a further 25bp in 1H16, with the risk of this increasing to 50bp), while hikes beyond this will be a dual function of movements in the currency (and inflation) as well as Fed policy changes. It is our opinion that the forward rate agreement (FRA) curve is fairly priced at present. We remain on course to achieve our objective of outperforming the benchmark by 2% and will remain vigilant to the myriad of (mostly) local risks in the coming quarter.