Fund review

For the quarter under review, the fund remained overweight floating rate notes, with a weighted average duration of 40 days at the end of September. The fund size was R24.8 billion at the end of the quarter.

Market overview

For the quarter under review, the South African Reserve Bank’s (SARB) MPC committee left the repo rate unchanged at 6.50%. The votes to keep the repo rate unchanged were unanimous. Inflation has remained around the mid-point of the inflation target, printing 4.3% year-on-year in August. Inflation expectations have moderated. However, the downside risks to growth remain and, in most sectors, are a serious concern. Growth in world trade volumes continues to decline due to trade wars between the US and China. There are risks of oil price shocks which will filter through to the fuel price in SA.

The reasons detailed for keeping the repo rate unchanged were rand depreciation of 4.6% against the dollar and a persistently uncertain environment. The governor of the SARB highlighted that the current challenges facing the economy are mostly structural and cannot be resolved by monetary policy alone. Structural reforms that raise growth and lower the cost structure of the economy remain urgent.

Looking ahead

The SARB adopted a wait-and-see stance as there are still concerns about Eskom’s restructuring, the Medium-Term Budget Statement (MTBS) which has been delayed by a week and Moody’s impending credit rating decision on SA scheduled for 1 November. Depending on the Eskom restructuring model being announced, a constructive MTBS and no downgrade from Moody’s, a further interest rate cut of 25 basis points is a possibility at the next MPC committee meeting, which takes place from 19 to 21 November.

The commentary gives the views of the portfolio manager at the time of writing. Any forecasts or commentary included in this document are not guaranteed to occur.

Fund review

During the quarter, the fund remained overweight Floating rate notes, linked to 3 month JIBAR, with the fund’s weighted average duration sitting at 41 days as at the end of this quarter. The fund size remained stable throughout the second quarter of 2019, closing off at R25 billion.

Market overview

During the quarter under review, we saw money market rates falling across the different tenors, with the largest declines in the 9 to 12 months areas. This was mostly driven by the volatility in the rand, as it adjusted to both local and international developments.The money market curve also continued to flatten, with 1 month JIBAR and 3 month JIBAR rates dropping by 7bps and 13bps respectively. The T-bill rates moved lower with the 3 months and 12 months rates closing off the quarter at 7.23% and 7.56% respectively. The Repo rate was left unchanged at 6.75% at the May MPC meeting, and has been at these since the first meeting of 2019. This at the back of the inflation rate that remains well contained within the inflation target band, however printing slightly higher at 4.5% in May 2019 from 4.4% in April 2019.

South Africa experienced a GDP contraction of 3.2% in the first quarter of 2019, this being the biggest contraction since the financial crisis. This decline was broad based,
with the main contributing sectors coming from the manufacturing, mining and agricultural sectors. The 2019 growth forecast has since been revised lower from 1.1% to
1.3%, as South Africa’s economy is expected to remain weak for some time

Looking ahead

Although South Africa’s inflation rate remains well contained within the inflation target band, it is expected to drift higher over the coming months. Given the recent declines in petrol price, subdued core inflation and weak domestic growth, the SARB”s statements have since changed to a dovish tone. The SARB’S recent stance, have also been influenced by recent interest rates developments from the international markets, mainly from the US and the ECB. The dovish statements from these markets, has resulted in local money market rates moving lower, with the FRA’s now fully pricing in a 25 bps rate cut at the July MPC meeting.
Overall, South Africa’s finances remain under pressure. SA’s government debt is expected to accelerate further reaching around 60.2% by 2023, while the tax revenue shortfall has been revised higher to R49 billion for the year 2019. The issues around state owned entities particularly Eskom, continue to weigh heavily on the economy, as the government tries to find ways to provide financial support. The next MPC meeting announcement will take place on the 18 July 2019.

The commentary gives the views of the portfolio manager at the time of writing. Any forecasts or commentary included in this document are not guaranteed to occur.

Fund review

The STANLIB Money Market Fund remained stable during the first quarter of 2019 at R24 billion. The fund remains overweight in floating rate notes with a weighted average duration of 34 days at the end of the quarter.

Market overview

The repo rate remained unchanged at 6.75% at the first two SARB Monetary Policy Committee meetings of 2019. This was based on weak economic growth and lower inflation. The forward rate agreements (FRAs), used to speculate on borrowing costs, are trading flat with a downward trend at the tail end of the curve. The annual rate of inflation increased from 4%y/y in January 2019 to 4.1%y/y in February 2019, which was in line with expectations. Encouragingly, core consumer inflation remained unchanged at 4.4% in February 2019 for the fourth consecutive month, highlighting that the underlying level of SA inflation remains very subdued despite recent rand and oil price volatility. Consumer inflation is expected to be contained at 4.7% in 2019. Growth forecasts were revised down for the next three years based on the global slowdown, declines in business confidence, power cuts and growing pressure on household disposable income. Growth is now expected to be 1.3% for 2019, down from 1.7% in January and 1.8% in 2020. At the end of the quarter, Moody’s decided not to update SA’s credit ratings. This means that the local and foreign currency debt rating remained unchanged at investment grade Baa3, with a stable outlook. S&P and Fitch both rank SA as sub-investment grade for local and foreign currency debt, with a stable outlook.
Looking ahead

We expect SARB will leave interest rates unchanged for the remainder of 2019 following the dovish tone of the committee at the MPC meeting in March. Over the medium term, the bank will continue to closely monitor international interest rate developments, especially in the US, developments within the agricultural sector, given that food inflation is off a very low base, and the impact of NERSA’s latest electricity price increase. Moody’s may wait until after the elections on 8 May to update its assessment of the country’s credit rating, as this will resolve some uncertainty about the economic and political outlook. The next designated rating action is scheduled for 1 November 2019.

The commentary gives the views of the portfolio manager at the time of writing. Any forecasts or commentary included in this document are not guaranteed to occur.

Fund review

The Stanlib Money Market fund size grew from R24.2bn in the second quarter of 2018, to R24.4bn in the third quarter of 2018. As at the end of the quarter, money market rates closed off higher due to a weaker Rand. 12months NCD rates moved from 8.025% to its highs of 8.40%, with the latter levels last seen in 2015. 12months Jibar linked notes traded around 90bps over 3 month Jibar. The 3 month Jibar rate moved higher, from 6.958% to close off the quarter at 7.008%, taking direction from the movements in the NCD rates. Although our fund attribution remained overweight Jibar linkers, we managed to realize added value from the NCD purchases done in the long-end of the curve.

Market overview

The market remained volatile during the quarter under review, as markets experienced large cash out flows due to recent developments in EM markets. The local currency depreciated to its highs of R15.53/$ aided by heighted global risk aversion towards EM markets. However, the local currency retreated towards the end of the quarter to close off at R14.12/$ as the USD weakened due to uncertainties around the trade tariffs agreements. The outcome of the quarter two GDP number that was released in the month of September, saw South Africa experiencing its first technical recession since the financial crisis in 2009. This resulted in the 2018 GDP number being revised lower from 1.2% to 0.7% as the economy is expected to remain under pressure. The 2018 inflation is expected to average 4.8%, as consumers are struggling to keep up with recent fuel hikes and VAT increases. Overall, the SARB remains concerned about keeping the inflation rate at the midpoint of the target range.

Looking ahead

While SARB left the repo rate unchanged at 6.50% at the September meeting, the votes were a close call with 3 of the members voting for a rate hike, while 4 members kept their view on hold. The monetary decisions that are to follow, will be closely monitored, more so as inflation is expected to edge closer to the upper end of the target band in 2019. The FRA’s are pricing in only an 11% probability of a 25bps hike at the November meeting, however with up to 50bps hike priced in, in a year’s time. October will be an important month as the Minister of Finance will deliver the MTBPS, while rating agency Moody’s is also expected to give their review on SA’s rating in the same month.

The commentary gives the views of the portfolio manager at the time of writing. Any forecasts or commentary included in this document are not guaranteed to occur.