Sanlam Namibia Floating Rate Fund - Sept 18
The third quarter again confirmed that the South African financial markets and economy are very much exposed to international events. The Rand weakened due to events in especially the developing markets, impacting interest rates. The main drivers of the mentioned events are discussed below.
South African economic growth figures for the second quarter were reported and indicated that the local economy had slipped into a technical recession with two consecutive quarters of negative growth. This marks the first local recession since the global financial crisis a decade ago. However, it was international events which caused the most damage during the quarter. The trade war between China and the USA is ongoing, but the sanctions imposed against Turkey about the detainment of an American pastor sent currencies in emerging markets into a tailspin in late August and early September, with the Rand/US Dollar exchange rate weakening from 13.76 to 14.17 and venturing beyond 15.40 at times. We are, however, of the view that the weak Rand is overdone, looking at a rate of R13.80 against the Dollar towards year-end.
During the quarter inflation stayed low, with inflation figures for the past three months respectively at 4.6%, 5.1% and 4.9%. The money market curve, however, followed the weakening Rand, sending the three-year point from 8.51% at the end of June to 8.72% at the end of September (refer to the full curve in the graph below). The steep curve is keeping returns depressed, but we still had a somewhat better quarter than the previous one. We are of the opinion that an increase in interest rates in the short term is possible, but that the weak growth figures and benign inflation make it unlikely. The outsider is the local price of fuel, which has a double impact against it. Firstly, the international price is pushed up by potential sanctions against Iran, and secondly, we pay more locally due to the weak Rand. The impact of this double whammy on inflation might unfortunately be considerable.
Auctions in the local credit market did see some action over the quarter. The likes of Mercedes and Toyota, combined with a few property companies, resulted in decent issues. However, the very high demand, especially from the banks participating strongly in the auctions as well, kept credit spreads very low. We managed to add some credit, but also invested in other yield-enhancing products.
What SIM did
All maturities were invested across the money market yield curve, making full use of the term premium. Quality corporate credit, which traded above the three-month Johannesburg Interbank Average (JIBAR) rate, was added to the portfolio. We preferred a combination of floating rate notes (FRNs) in the portfolio together with fixed-rate negotiable certificates of deposits (NCDs) - exposure to the latter was increased during the quarter because NCDs provided value due to the steeper yield curve. The combination of corporate credit, high yielding NCDs and FRNs will enhance portfolio returns.
In order to provide an enhanced return in the portfolios, our preferred investments are a combination of fixed-rate notes, floating rate notes a investments are a combination of fixed-rate notes, floating rate notes and quality corporate credit. Fixed-rate instruments will be purchased when they provide value, keeping within the duration limits of the portfolios.
The objective of the fund is to earn interest in excess of normal money market funds by investing into money market securities of a floating rate nature. Investible universe includes certificates of deposit, promissory notes, debentures, bills and deposits.