Fund review The Fund size slightly increased by R19 million in the last quarter to R288 million. The 3 month Jibar rate decreased from 7.342% to 7.05% at the end of the third quarter of 2017, following the SARB cutting the repo rate to 6.75% and the market starting to price in higher probabilities of a rate cut. Income Fund returns are still compelling when compared to cash which makes the Fund attractive.
Looking Ahead The third quarter of 2017 was positive for Emerging Market assets, buoyed by the lack of market conviction that interest rates will be much higher in Developed Markets due to benign inflation. Labour markets in the US continued to tighten during the quarter, but wage inflation struggled to increase even with the economy at full employment. The Euro area also experienced improved growth and tightening labour markets but inflation failed to overshoot their target of 2%. As a result the hunt for yield saw improved flows into emerging market economies, with South Africa being one of the beneficiaries in the quarter.
According to the JSE statistics, foreign investors increased their local currency bond holding by R28bn during the third quarter, bringing the total for the year to R68bn. This, coupled with the coupon payments totalling R43bn and the redemption of the R203 bond, supported the local currency and fixed income markets. The Rand traded to a high of R12.78/$ after opening the quarter at R13.07/$ which pushed the premium paid to ensure the 5 year South African government debt (CDS spread) lower to 163 basis points, levels last seen in 2014. The 10 year bond yield rallied from 8.78% to 8.32%, before ending the quarter higher at 8.55%. As a result the All Bond Index returned 3.7% during the quarter, bringing the year-to-date total return to 7.8%. The positive returns were also buoyed by the largely unexpected repo rate cut by the Reserve Bank at the July Monetary Policy Committee (MPC) meeting, citing low growth and the persistent low inflation.
With the market fully pricing in an interest rate cut the MPC decided not to cut the repo rate at their September meeting, citing increased risks to currency weakness which will in turn negatively impact the inflation outlook. Of concern for the fixed income market in the fourth quarter is the potential monetary policy tightening by the US Federal Reserve and European Central Bank which is expected to announce the tapering of their Quantitative Easing program. Locally, the Medium Term Budget Policy Statement in October and the ruling party’s conference to elect their leaders in December will be watched with keen interest. Even though rating agencies will announce their ratings outcome in November and December.