Markets & economy

Uncertainty persists

The increased uncertainty that arose in December of last year has persisted throughout the first quarter of 2016. The current political climate and the threat of looming ratings downgrades have seen the rand and the interest rate market remain weak and volatile.

South Africa still grapples with rising inflation and a decreasing growth outlook. GDP growth continues to be revised downwards and is currently estimated to be only 0.8% in 2016. This is worrying as this metric has been highlighted as a key concern by the rating agencies. The current account deficit is also expected to remain wide at -4.6% of GDP in 2016.

The latest reading of Consumer Price Inflation (CPI) for February showed an increase of 7.0% year on year, the highest rate since May 2009 and well outside the inflation targeting band of 3% to 6% set by the South African Reserve Bank (SARB). The main drivers of this weak inflation number were: food (up 8.8%), transport (up 8.7%) and electricity (up 11.2%). The second round effects of the weaker rand are now starting to come through in the inflation numbers and the drought remains an issue for future food prices.

In the latest statement from the Monetary Policy Committee (MPC) of the SARB, inflation is forecast to average 6.6% for 2016, with breaches of the target inflation band in every quarter of 2016. This, as well as the weak exchange rate, has forced the MPC to raise the repurchase rate by 50 basis points in January and another 25 basis points in March. This brings the total increase to 100 basis points over the past three consecutive meetings and the rhetoric from the statement indicates that there are likely to be more hikes to come as the MPC sticks to its inflation-targeting mandate.

We continue to take advantage of the steep money market yield curve by investing in six-month deposits as well as floating rate notes. The floaters will benefit from the rising interest rate environment that we are in. The volatility in interest rates has caused occasional spikes in the one-year area of the curve, which the Allan Gray Money Market Fund has capitalised on while being cognisant of duration risk. We also see value in shorter-dated treasury bills for liquidity.

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