2018/12/14 00:00:00

With the South African 2nd Quarter GDP print confirming that the economy has entered into a recession, local markets started on the backfoot in September. The ZAR weakened by more than 5% post the print and dragged interest rates higher. The Monetary Policy Committee (MPC) remains in a difficult position with rising inflation and falling growth. This was evident in their decision to leave rates unchanged during the September MPC meeting, with a close 4 to 3 vote in favour of leaving rates unchanged. We used the move higher in interest rates to further gradually increase duration in the Fund. With local inflation expected to remain within the target band for the forecast period and growth remaining subdued, we see little risk in the MPC increasing rates by more than what the market currently expects. Local headlines continue to dampen investor appetite as uncertainty surrounding property rights are being fueled by pre-election rhetoric. Given the uncertain nature of current conditions, we are measured in our approach and will continue to look for opportunities to further add duration. The Fund earned an attractive real yield of between 3.5% and 4%. Should interest rates rise, it will benefit from the low duration profile as yield earned will rise with the market. In our view, the bigger risk is rising inflation, which will threaten the portfolios real return target. To this end, the portfolio holds an inflation swap, a dollar currency option structure and an emerging market hedge position. These will provide some performance enhancements to the portfolio should EM/rand/inflation risk materialise.
The Fund underperformed both cash and the ALBI 1-3 year index in September but remains above its benchmark for the year. The performance came from good quality credit held, which generated yield over and above the benchmark. The underperformance came from the inflation hedges as the ZAR, after initially weakening, ended the month in positive territory. The increase in duration also added return to the Fund during September as the fixed yields were entered at attractive levels.