STANLIB Bond comment - Jun 17 - Fund Manager Comment21 Sep 2017
Fund review
The size of the Stanlib Bond Fund was R3.3 billion at the end of the second quarter of 2017 compared to R3.6 billion at the end of the first quarter. The Fund’s modified duration was increased from 6.50 years to 7.00 years during the quarter as bond yields were oversold following the risk-off environment created by central bank rhetoric. The increase in duration was achieved by increasing the weight in the 12+ area of the benchmark. The yield curve steepened during the quarter, as the long end was negatively affected by anticipation of increased funding requirements from the government. The Fund retained the overweight position in credit.
Looking Ahead
Given the negative political headlines and rating agency actions that characterized the second quarter, bonds performed well with the All Bond Index returning 1.50% during the quarter and outperformed other asset classes with a 4.00% return for the first half of the year.
The cabinet reshuffle at the end of the first quarter, which saw the finance minister and his deputy being replaced, caused the weakness in the local 10 year bond yields to spill over to the second quarter. This was viewed as a buying opportunity by foreign investors, amidst the risk-on environment which benefitted Emerging Market assets, as they increased their local bond holdings by R21bn during the quarter. As a result bond yields rallied to 8.35% before closing the quarter weaker at 8.79% due to market concerns that major central banks will tighten monetary policy conditions quicker than initially anticipated. Though it ended the quarter largely unchanged at R13.10/$, the Rand traded to a low of R12.56/$ during the quarter also on the back of positive EM sentiment. The 5 year SA sovereign risk spread improved from a high of 225 basis points in the quarter to 199 basis points at the end of June in line with peer emerging markets spreads
South Africa was downgraded by the 3 rating agencies in the quarter, with Standard & Poors and Fitch cutting the foreign currency rating to sub-investment grade, and Fitch also cutting the local currency rating to below investment grade. Both Moody’s and Standard & Poors have the local currency rating 1 notch above the sub-investment grade, with the risk that any of them cutting the local currency rating to below investment grade will lead to capital outflows as some of the foreign investors will be forced to sell local currency bonds. This will lead to higher borrowing costs for the government, putting pressure on the already strained fiscal position exacerbated by the technical recession.
STANLIB Bond comment - Mar 17 - Fund Manager Comment09 Jun 2017
Fund Review
The Fund’s return year to date at the end of the first quarter was 4.47% compared to the benchmark return of 1.76%. The overweight position in emerging market debt contributed strongly to the outperformance achieved during the first quarter of 2017. The decline of the USD from a 14-year high saw most major currencies posting gains against the weaker USD, with the Mexican Peso up 10%. International investors sharply increased allocations to emerging market assets, pushing bond and equity prices up sharply.
During the first quarter, growing signs of a synchronized global recovery faced off against political headwinds. While the net effect on financial markets was largely positive, several themes reversed course as the quarter progressed. Despite strong equity performance, bond yields remained low and range-bound, particularly after a new U.S. healthcare bill failed, raising doubts around the new administration’s ability to implement its growth agenda. Overall, developed bond markets generally finished the quarter sideways.
Most major currencies posted gains against the weaker USD and stronger global growth, including the euro (up 1.4%), British pound (up 1.6%), Swiss franc (up 1.7%), Swedish krona (up 1.7%), and Norwegian krone (up 0.6%). As the U.S. backed away from protectionist threats, the trade-sensitive Asian region responded favorably, and the Japanese yen (up 4.8%) recovered. However, after depreciating significantly since the U.S. election, the Mexican peso (up 10.0%) was the quarter’s leader. With aggressive Fed tightening unlikely and more constructive trade rhetoric emerging, the peso rallied, its attractiveness further enhanced by a series of rate increases from the Bank of Mexico.
Assets poured into emerging markets during the quarter, benefiting both stocks and bonds and driving up most currencies. Improving demand from Europe and Asia helped boost commodities and exports, and last year’s enormous Chinese stimulus continued to work to the benefit of many emerging markets. Meanwhile, the U.S. seemed to soften its trade rhetoric, reversing much of the fallout to emerging markets since the November election. Investors, encouraged by solid economic data and a more sanguine outlook for global trade, remained optimistic for accelerating global growth accompanied by only gradual tightening on the part of the Fed. Higher-yielding and attractive growth markets like Indonesia and India continued to lure yield-seeking investors, with the rupiah (up 1.6%) and rupee (up 4.8%) both advancing
Looking ahead
Brandywine, the fund manager, believes the role of fiscal policy will rise to prominence in 2017. Emerging markets will have plenty of room to cut rates if global growth remains challenged, although they expect better growth. They believe that stimulus in China and Fed policy will remain the largest determinants of global growth.
They still expect long-term safe-haven yields to remain capped on the upside. They still believe that select emerging market debt offers the most attractive sources of yield and potential currency return among their investible universe, especially select commodity-linked currencies.
STANLIB Bond comment - Dec 16 - Fund Manager Comment20 Mar 2017
Fund review
During the fourth quarter of 2016, the size of the Stanlib Bond Fund increased from R3.3 billion to R3.7 billion due to new inflows into the portfolio as bond yields looked cheaper post the selloff experienced following the correction in the US bond market. The modified duration of the Fund was kept at 7.2 years, which was in line with the ALBI. Compared to the benchmark, the Fund’s credit positioning was retained at an overweight level. The yield curve positioning in the long end constituted 60% of the portfolio holdings compared to 61% of the ALBI. The long end of the yield curve outperformed despite more of government issuances occurring in that area.
Looking Ahead
The All Bond Index returned a 15.5% for the year as a whole and 0.4% for the last quarter of the year. This makes the asset class to be the best performing in the South African market. The South African 10 year bond yield ended the quarter at 8.91%, weakening from the last quarter close of 8.67% as the market priced in a much higher probability of the US increasing interest rates, and the impact of Donald Trump winning the US elections. In the end, the US Fed increased interest rates by 0.25%, but also indicated that they may increase the Fed Fund rate by 0.25% another three times in 2017.
The bond market movements over the fourth quarter was largely driven by the selloff of the US Treasuries market, where they tracked higher in response to Donald Trump being elected president of the US, elevating the probability of the FOMC continuing to hike short term rates. US 10 Year Treasury notes sold off aggressively from 1.595% to end the last quarter of the year at 2.445%, thereby causing some jitters in emerging markets. Foreigners who had been increasing exposure in emerging markets in the third quarter of 2016 ended up selling R34 billion of South African bonds in the fourth quarter, as yields traded above 9.20% at one stage. On the positive front, South Africa managed to stave off the threat of a downgrade to junk status by the rating agencies, although Standard and Poor’s downgraded the local currency rating by one notch. As a result the CDS spread ended the year at a respectable 215 basis, after starting the quarter at 260 basis points.
During the fourth quarter, the South African Reserve Bank (SARB) left interest rates unchanged despite inflation still printing above the 6% target level, however, there is growing expectation that inflation will track lower in 2017. Despite the volatility experienced in the local currency, when it weakened to R14.50 in November post the US election, it ended the year at a respectable R13.73. The SARB is expected to leave interest rate unchanged.