Sygnia All Bond Index Fund - Sep 19
The OECD cut its world growth forecast to 2.9% from 3.2% as intensifying trade conflicts take a toll on confidence and investment. On 1 September, the US implemented a further 15% import duty on $110bn of Chinese imports, and China retaliated by implementing tariffs on $75bn of US goods. With drone attacks on Saudi Arabia affecting more than half their oil supply and pushing the price of oil up nearly 20%, trade wars were eclipsed by the threat of world wars. The US, UK, France and Germany have blamed Iran for the attacks, with Trump saying the US is “locked and loaded depending on verification”; US-Iran relations remain a major risk to global stability, with global political uncertainty levels at a five year high.
Central bankers continue to do their best to support growth, with Bank of America Merrill Lynch’s Emerging Monetary Mood Indicator at its most dovish since 2009. September saw Russia’s central bank slash its interest rate for a third consecutive session, to 7%. Indonesia cut rates for the third time, the Turkish Central Bank cut the benchmark lending rate by 3.25% to 16.5% and the Brazilian Central Bank trimmed the benchmark rate by 50 bps to 5.5%. The SARB held our repo rate steady despite weak inflation of 4.3% in August.
The SACCI business confidence index fell to 89.1 points in August, the lowest level since April 1985. The Chamber noted that the “current state of fiscal deficiencies, social injustices and unemployment necessitates an urgent adjustment”, and Moody’s noted that Eskom’s financial position remains a significant threat to economic growth and government debt levels. However, the agency acknowledged that progress would be slow, offering South Africa a temporary reprieve from a sovereign downgrade for the next 12 to 18 months.
US consumer sentiment fell to 89.8 in August, the largest fall since 2012 and its lowest level during Donald Trump’s presidency, amid concerns about the impact of US trade wars. Federal Reserve data showed factory output falling for a second consecutive quarter. This allowed the Fed to lower the main interest rate for a second time this year, but due to steady inflation, the committee was divided on the need for further easing.
Despite lowering the key rate, US bank liquidity dried up in September, forcing the Fed to conduct its first repo auction in a decade, injecting over $400bn into US money markets as overnight repurchase rates spiked as high as 10% and threatened to bring markets and businesses to a standstill. This is a form of quantitative easing, as Fed reserves proved insufficient to fund the US banking system. Speaker of the US House of Representatives Nancy Pelosi announced a formal Trump impeachment investigation, in which Trump is accused of seeking foreign help from Ukraine to smear Democratic rival Joe Biden ahead of next year’s presidential election. However, the challenge is unlikely to pass given the Republican majority in the US Senate. inflation overshoot.
Despite massive opposition, ECB President Mario Draghi restarted quantitative easing and cut interest rates. From 1 November, bond purchases will be conducted at a monthly rate of €20 billion and will continue until interest rates are raised. Reinvestment of maturities will continue as long as necessary and well past the time that interest rates start to rise. The deposit rate was cut from -0.4% to -0.5% and, to support bank lending, a two-tiered system for reserves will be introduced, in which part of the banks’ excess liquidity will be exempt from negative remuneration on the deposit rate facility. Interest rates will only rise when inflation has robustly returned to the 2% ECB target.
UK manufacturing PMI fell to a seven-year low of 47.4 in August. The British parliament voted to force Prime Minister Boris Johnson to delay Brexit to 31 January 2020, and Johnson lost his second attempt to trigger an early general election. Parliament was prorogued until 14 October, but the UK supreme court ruled that Johnson’s advice to the queen to prorogue was “unlawful, void and of no effect”, and parliament reconvened on 25 September. Johnson was defiant and refused to resign or apologise. UK Chancellor of the Exchequer Sajid Javid unveiled a £13.8 billion boost to government spending in areas such as health, education and security – the largest increase in public spending in 15 years.
India’s economy grew at a slower-thanexpected rate in the three months to June, at 5 percent year-on-year. As a result, India’s government announced a reduction in the corporate tax rate to boost the economy.
The Chinese official manufacturing PMI eased slightly to 49.5 in August, staying below 50 for the fourth month in a row, while industrial output and retail sales grew more slowly than expected. However, Chinese service sector data for August showed its fastest expansion in three months. The People’s Bank of China announced a 50-basis-point cut in the reserve requirement ratio, which will take the cash reserves to their lowest since 2007. China also cut its one-year benchmark lending rate by 5bp (from 4.25% to 4.20%) for the second consecutive month in attempts to further support growth.
The Sygnia All Bond Index Fund tracked the composition of the JSE All Bond Composite Index (ALBI) during the quarter, in line with its investment objective, and delivered a return of 0.79%.
Foreign investors continued to sell local bonds in Q3, selling approximately R22.4bn nominal worth of South African Government bonds – versus the R14bn sold in Q2. This brings the net selling to R33.4bn since the start of the year. The modified duration of the fund decreased from 7.14 at the end of June to 7.10 at the end of June 2019, in line with the duration of the ALBI, at 7.06.
TN23 replaces TN20 in the index, with a duration shorter than a year due to the short term not being suitable for the index. TN23’s redemption date is in November 2023. The weight of the R186 increased by 0.8%, the biggest bond increase for the quarter, while the weight of the R2048 fell by 0.6%.
The yields on the constituents of the index rose across the spectrum, with the shortestdated bond leading the pack and increasing to 6.635%, compared to 6.325% at the end of June. On average, the curve showed parallel movement, with the midterm bonds’ yield increasing less than its surrounding maturity bonds.
The composition of the Portfolio will be compared to the composition of the Index on a daily basis, taking into account any new investment contributions or withdrawals to and from the Portfolio, the receipt of any coupon payments for reinvestment, the effect of any corporate actions and its impact on the composition of the Portfolio relative to that of the Index. A tracking error minimising algorithm is used to determine the least number of transactions required to keep the Portfolio's returns aligned as closely as practically possible to the Index's returns while at the same time keeping the trading costs in the Portfolio to a minimum. The tracking error will never exceed 2% (two percent) on an annual basis. All cash movements and instrument events are taken into account daily in order to re-align the Portfolio to match the returns of the Index as closely as practically possible. The 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 Index more effectively.