NAV on 2019/07/19
|NAV on 2019/07/18
|52 week high on 2019/06/28
|52 week low on 2018/10/25
|Total Expense Ratio on 2019/03/31
|Total Expense Ratio (performance fee) on 2019/03/31
Satrix Managers (Pty) Ltd.
South African--Interest Bearing--Variable Term
FTSE/JSE All Bond Index
Fund Manager Comment - Mar 19
The 'Fed Put' is the belief that the US Federal Reserve (Fed) can always rescue the economy (and markets) by lowering interest rates. Markets were very volatile at the end of 2018 and it seems like the Fed Put is alive and well. The Fed turned outright dovish in January, with various governors indicating that they favoured leaving rates at current levels for an extended period because inflation had remained low. Yields on the benchmark US 10-year bond fell to 2.40% from 2.62% after the March Federal Open Market Committee meeting wherein the Fed 'dot plots' indicated that the Fed was unlikely to raise rates this year and the median 'dots' indicated only one rate increase in 2020. In Germany and China indicators of growth such as the Manufacturing Purchasing Managers' Index (PMI) have printed lower than expectations, resulting in monetary stimulus in China and expectations of continued accommodation in Europe. German and Japanese 10-year bond yields rallied to - 0.07% and -0.09% respectively. The global stock of bonds trading with negative yields increased from US$8.325 trillion in January to US$10.353 trillion at the end of the quarter.
Bond Market Review
Minister of Finance Tito Mboweni delivered the national budget in February, which forecast deficits of over 4% over the medium term. In the budget, government also allocated R69 billion to Eskom, but failed to do so in a deficit-neutral way. The financing requirement is projected to increase to R335 billion in the 2019/20 fiscal year from R239 billion previously. R216 billion will be financed via local bonds, R65 billion will come from cash resources and the balance from T-Bills and offshore bonds.
In February and March South Africa experienced stage 4 load shedding, which is expected to have a negative impact on the first-quarter growth rate. Yields on South African bonds underperformed the rally in developed markets partly because of increased risk of a credit downgrade from Moody's, which would have resulted in South Africa losing its investment-grade status and falling out of the World Government Bond Index. Moody's was scheduled to announce its latest credit opinion on South Africa on 29 March.
Foreign investors bought R11.3 billion of South African bonds in January as emerging market funds attracted a lot of inflows, however, flows turned slightly negative in February as worries about global economic slowdown increased and country-specific issues dominated.
With inflation printing at 4% and 4.1% in January and February respectively, demand on inflation protection has been low. Inflation-linked bonds (ILBs) have continued to underperform nominal bonds. The Government Issued Bonds (IGOV) Index returned just 0.5% for the quarter compared to the FTSE/JSE All Bond Index return of 3.76%. Yields on the 15-year ILB (R202) traded at 3.32%, their highest level since June 2009, and the long-dated I2025 touched a new high of 3.42%.
We saw continued spread tightening on corporate bonds in the past quarter. Another standout feature was the large number of privately placed bonds rather than public auctions. Spread tightening is happening despite obvious signs of financial stress in a number of sectors and as a result we did not increase exposure to credit.
We view the global growth slowdown as a 'mid-cycle' slowdown rather than the beginning of a recession, particularly in the US, where the economy still has good momentum. If we are correct, then the Fed is unlikely to cut rates and their next move could well be up. Ten-year bond yields at 2.4%, below three-month cash rates, require rate cuts to be sustained.
In South Africa we have seen growth forecasts revised lower in part due to load shedding, slow credit growth and weaker consumer spending. Inflation risks are low, but downgrade risk is going to remain high and the South African Reserve Bank (SARB) is likely to err on the side of caution and leave policy rates unchanged. Unlike the SARB we think current policy is restrictive rather than accommodative and should the economy continue to falter, then the SARB could cut rates.
Given yields available on one- and two-year negotiable certificates of deposit and our benign inflation outlook, risk-adjusted returns on cash are very attractive relative to bonds. ILBs is the least favoured fixed-income asset class.
The investment objective of the Satrix Bond Index Fund is to achieve a return which will equate to the annual return of the portfolio benchmark which is the BEASSA All Bond Index. This will be a passively managed portfolio which will track the BEASSA All Bond Index.
This portfolio will invest in assets in liquid form, and in high yielding non-equity securities and interest bearing securities including but not limited to public, parastatel, municipal and corporate bonds, inflation linked bonds, loan stock, debentures, fixed deposits and money market instruments. When investing in derivatives, the Manager will adhere to prevailing derivative regulations. The portfolio manager will invest in derivatives for cash flow management purposes, as this is more cost effective, and to enable the investment manager to achieve the objective of tracking the BEASSA All Bond Index more effectively.