2019/10/17 00:00:00

The US Fed cut interest rates in September, which was in line with consensus. Markets are pricing in a further 3 to 4 cuts by 2021. Locally, the Monetary Policy Committee (MPC) members unanimously decided to leave the repo rate unchanged at 6.5% and stated, “The implied path of policy rates over the forecast period generated by the Quarterly Projection Model indicated no changes to the repo rate.” Forward rate agreements are now pricing a lower chance of a cut over the next 12 months, having moved out by 17bps after the MPC statement. The release of the Medium Term Budget Policy Statement (MTBPS) has been delayed to the 30th of October, which won’t give Moody’s much time to analyse details proposed by the budget for the year ahead, before their rating review announcement on the 1st of November. These will be key events driving the month ahead.
The Fund is still earning an attractive real yield of between 3.5% and 4%, with a strong focus on high quality, shorter term liquid assets. We remain cognisant of the looming risks and will again wait for an opportunity to increase the duration in the Fund. Should interest rates rise, it would 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 Fund’s real return target. To this end, the Fund holds an inflation swap, a currency option and an emerging market hedge position. These will provide some performance enhancements should emerging market or inflation risk materialise.
The Fund outperformed its benchmark in September, as well as over the last 12 months. The bulk of the performance came from good quality paper held, which generated yield over and above the benchmark. The inflation hedges in the portfolio added to the performance over the month as we saw the rand weaken.