nvestment Manager Commentary
Taquanta Asset Management

In the US, there are early signs of renewed positivity and faster growth. On one hand, retail sales grew at a pace of 3.0% year-on-year beating market expectations. The housing and construction sectors recovered, while measures of consumer confidence rebounded strongly. On the other hand, industrial production declined for the eighth consecutive month on a year-on-year basis. In the UK, the referendum on whether to stay or exit the EU is approaching and the mood among companies, consumers and investors improved as the latest polls suggest that the public is swinging in favour of staying in the EU.

Locally, the South African economy appears to have weakened from the final quarter of 2015. Mining production fell by approximately 20% quarter-onquarter on a seasonally adjusted and annualised basis while the manufacturing sector only managed growth of 0.5%. The Reserve Bank revised its growth forecasts for 2016, 2017 and 2018 downwards to 0.6%, 1.3% and 1.7% respectively. The SARB’s Monetary Policy Committee (MPC) left the repo rate unchanged at its latest MPC meeting. The committee felt that the earlier interest hikes contributed to the downward management of the longer-term inflation outlook. The governor of the Reserve Bank, Lesetja Kganyago, made it clear that the South African economy remains in a rising interest rate cycle. On 03 June 2016, Standard and Poor’s (S&P) kept South Africa’s long-term foreign currency rating at BBB- with a negative outlook. S&P says it "could lower the ratings if GDP growth does not improve in line with our current expectations", or if "institutions became weaker due to political interference".

CPI inflation in South Africa reduced slightly to 6.2% year-on-year from 6.3% the previous month. The reduction in the headline figure was mainly due to lower oil prices. Food price inflation continued to increase; it rose to 11.3% year-on-year from 9.8%. The main upward pressures in South Africa’s inflation in the months going forward are likely to come from the increases in the food sector. Core inflation increased slightly to 5.5% year-on-year from 5.4% the month before. PPI inflation moderated for the second consecutive month to 7.0% year-on-year from 7.1% the month before. Food products and oil prices continued to put pressure on South Africa’s PPI inflation.

Private sector credit extension (PSCE) slowed substantially in April to 7.1% year-on-year from 8.7% the previous month. Loans to households reduced to 2.3% year-on-year from 4.6% the month before. Household credit was dragged down by unsecured credit, which declined to -1.9% year-on-year from 7.1% the previous month. Loans to companies also declined to 12.1% year-on-year from 12.8% the month before. Both companies and households are likely to be hesitant to take on debt as profits and job security come under pressure. Money supply reduced to 9.0% year-on-year from 10.3% the month before.

The yield on the Nedgroup Investments Core Bond Fund as at 31 May 2016 was 9.88%.

The FTSE/JSE All Share index lost 2.99% for the month ending 31 January 2016: driven primarily by weaker industrials (-2.92%), financials (-3.34%) and a significant drop in resources (-2.72%). Resources, industrials and financials comprised 15%, 63% & 22% respectively of the FTSE/JSE All Share free float index (at the beginning of the month). The rand plummeted against all the major currencies: against the US dollar (2.6% to R15.86), against the euro (2.5% to R17.22) and the British pound (0.27% to R22.61). The Commodity Index (CRB) lost 5.38% in dollar terms. The dollar gold price increased 5.36%; and the oil price dropped 3.46% to a new low, ending the month at $36 per barrel.

The All Bond Index rose 4.6% for the month while the BESA Barclays Inflation-linked Bond Index was trading 0.78% higher. The STeFI Call Deposit Index increased 0.50%, while CPI increased slightly month-on-month to the end of December (0.3%).

Globally, stocks plunged in January recording their worst start to a new year in over two decades. Focus was on China, as investors sold Chinese stocks after the People's Bank of China devalued the yuan. Emerging market currencies and international commodity prices also weakened. China's GDP for 2015 grew by 6.9%, down from 7.3% in 2014, the weakest growth rate in 25 years. In the US, GDP growth slowed to 0.7% quarter-on-quarter in the last quarter of 2015, down from 2.0% growth the third quarter of 2015. The US Federal Reserve kept interest rates unchanged at its January meeting and stated that they are closely monitoring global economic and financial developments. The IMF revised its US growth forecast to 2.6% from 2.8% for 2016.

Locally, South Africa experienced difficulties in the past two months, testing the economy in ways last experienced in the 2007/2008 global financial crisis. The JSE All share index dropped significantly over December 2015 and January 2016. The South African currency also depreciated in the same period; the rand weakened by 6.7% in December and a further 6.0% in January. The weakening of consumer and business confidence and the above will hurt growth prospects in South Africa. In line with market expectations, the Reserve Bank's Monetary Policy Committee hiked interest rates by 50 basis points, taking the repurchase rate to 6.75%. Market deterioration, weakening of the rand and the signs of rising food prices in the near future were the main reasons for the rate hike. As expected, South Africa's CPI inflation increased from 4.8% to 5.2% year-on-year. On a month-on-month basis, CPI rose 0.3%. The upward pressure was mainly driven by increased housing costs and food prices which have started picking up momentum due to the drought conditions currently being experienced in South Africa. Core inflation increased to 5.2% year-on-year from 5.1% the previous month. PPI inflation increased to 4.8% year-on-year following a 4.3% year-on-year growth the previous month. PPI inflation is likely to increase over the next few months as food price inflation increases due the drought.

Private sector credit extension (PSCE) growth increased to 10.3% year-on-year form 9.5% the previous month. The growth in PSCE was mainly driven by corporate credit which accelerated to 16.1% year-on-year from 14.4% the month before. Household credit reduced to 4.5% year-on-year form 4.6% the month before. Household credit is expected to slow down gradually, dragged down by higher interest rates, tighter NCA regulations and prospects of increasing unemployment in 2016. Money supply (M3) increased to 10.44% year-on-year from 9.35% the previous month.

SARB governor Kganyago, indicated that the monetary policy remains in a tightening cycle, but stressed that the timing of future rate moves will be data dependant. Given the risks of further downgrades to South Africa's sovereign ratings and rising risk aversion among global investors towards emerging markets, the rand is likely to remain vulnerable and volatile.

The yield on the Nedgroup Investments Core Bond Fund as at 31 January 2016 was 9.7%.