Satrix Money Market Comment - Sep 19
In the second quarter, SA’s GDP grew by 3.1% year-on-year (y/y), recovering almost fully from the similar-sized dismal contraction in the first quarter. The factors responsible for the recovery were predominantly the opposite of those in the first quarter, namely recovery from a low base and the positive impact of reduced power cuts by Eskom on mining and manufacturing production.
Headline CPI inflation remained surprisingly low over the quarter, improving to 4.3% y/y in August, from 4.5% y/y in June. In July, it was even as low as 4% y/y, mainly as a result of lower fuel price inflation and also, surprisingly, lower electricity and food price inflation.
With inflation at lower levels, the South African Reserve Bank (SARB) cut the repo rate with 25 basis points (bps) at its July Monetary Policy Committee (MPC) meeting, from 6.75% to 6.50%, providing the economy with much-needed support.
At its September MPC meeting, the SARB kept the repo rate unchanged at 6.50%, following a unanimous vote. They are of the opinion that risks to the inflation outlook are balanced. Their 2019 inflation forecast was lowered to 4.2%, the 2020 forecast remained unchanged at 5.1%, and the 2021 forecast was increased slightly to 4.7% from 4.6%. They kept the 2019 growth forecast unchanged at 0.6%, lowered the 2020 forecast to 1.50% from 1.80%, and lowered the 2021 forecast to 1.80% from 2%. Speaking to Bloomberg earlier in the month, SARB Governor Lesetja Kganyago mentioned that the jump in GDP was from a low base, and consequently the SARB is not changing its 2019 growth forecast of 0.6%.
Eskom remains the biggest risk for the SA economy, which was reiterated again with the release of their FY2019 results, recording a R20.7 billion loss. Early in the quarter, Finance Minister Tito Mboweni tabled the Eskom Special Appropriations Bill, which provides for an additional R59 billion for this fiscal year and 2020/21. They also did not provide any information on the planned unbundling and reform. The Chief Restructuring Officer was only appointed at the end of July. This shows that they are struggling to come up with solutions on how to take the struggling parastatal forward. National Treasury also announced that they will increase its weekly SA government bond issuance by R1.51 billion, of which a substantial portion will be used to support Eskom.
At the Sub-Saharan Africa Summit, Moody’s stated that the chances of a downgrade in the next 12 to 18 months are small. According to them, worst-case fiscal metrics are a 70% debt-to-GDP ratio and a fiscal deficit of 7% of GDP, and the best case is a debt-to-GDP ratio of 65%, which is still similar to other BBB- rated countries at 60%. The Moody’s rating outlook is currently stable, but there is a good chance that it can be changed to negative. National Treasury recently issued US$5 billion worth of Eurobonds, which will help to reduce SA’s fiscal deficit significantly.
Government is close to finalising a programme for the redistribution of state-owned land. If implemented successfully, this will be positive for the economy, investors and rating agencies. President Cyril Ramaphosa also recently announced the appointment of an Economic Advisory Council, which will aid the government and presidency in the development and implementation of growth-boosting policies.
During the quarter the US Federal Reserve (Fed) cut interest rates twice by 25 bps. They stated that this is not necessarily the start of an extended rate-cutting cycle. They stated that this is not necessarily the start of an extended rate-cutting cycle. The objectives of the rate cuts are to insure their economy against downside risks from weak global growth and trade policy uncertainty, to help offset the effects that these factors currently have on the economy and to promote a faster return of inflation to their 2% target. The European Central Bank also cut their benchmark interest rate by 10 bps and restarted their stimulus programme, intending to buy €20 billion of bonds per month.
Core CPI remained unchanged at 4.3% y/y during the quarter. PPI inflation decreased from 5.8% y/y in June to 4.5% y/y in August. The Rand weakened to 15.17 against the US Dollar from 14.11 during the quarter. The 10-year SA government bond yield weakened to 8.92% from 8.69%. The trade balance increased from a surplus of R2.1 billion to one of R6.84 billion. The unemployment rate increased from 27.6% in the first quarter to 29% in the second quarter.
The money market yield curve shifted down after the 25-bps rate cut in July. After the September MPC meeting, where the SARB kept the repo rate unchanged, the curve steepened a little again. Now, with the SARB’s inflation expectations for 2020 and 2021 still being above the midpoint (4.5%) of the target range (3-6%), the market is only expecting one 25-bps rate cut over the next year.
What we did
All maturities were invested across the money market yield curve, exploiting the term premium as well as adding some higher-yielding fixed-term negotiable certificates of deposit (NCDs). Quality corporate credit, which traded above the three -month JIBAR rates, was added to the portfolio. We preferred a combination of floating rate notes in the portfolio together with some fixed-rate NCDs. The combination of corporate credit, high-yielding NCDs and floating rate notes will enhance portfolio returns.
Our preferred investments would be a combination of fixed-rate notes, floating rate notes and quality corporate credit to enhance returns in the portfolio. Although the curve steepened a little, fixed-rate notes are still not providing enough compensation for their additional interest rate risk compared to floating rate notes.
This fund aims to deliver a higher level of income than fixed deposits and call deposits over time. Capital preservation is of primary importance and the fund offers immediate liquidity. The fund has no offshore exposure.
The fund invests in a range of money market instruments which include negotiable certificates of deposit, bankers' acceptances, debentures, treasury bills and call accounts. The fund may only invest in money market instruments with a maturity of less than 13 months. While capital losses are unlikely, they can occur if, for example one of the issuers of an instrument held by the fund defaults. In this event losses will be borne by the fund and its investors.