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Monthly Investment Report - Pension Fund

February 2019

The rand swapped its title of the best-performing emerging market currency for the
worst performing as the local unit depreciated 6.3% against the U.S. dollar, 7.5%
against the pound and 5.6% against the euro. The local currency was pulled back and
forth by a series of local and global factors. On the local front, Eskom's precarious
financial position and subsequent load shedding coupled with concerns regarding
slower global growth and the country's fiscal metrics all contributed to the rand
weakness. Thankfully, the continuation of the U.S. Fed's dovish rhetoric was a source
of support for risk assets such as the rand.

Finance Minister Tito Mboweni tabled the 2019 National Budget during the month. The
Minister emphasised the fine balancing act of being cognizant of the fiscal situation
while acknowledging the significant risk that Eskom poses to the economy. The 2019
National Budget showed that the fiscal framework remains fragile. Medium-term
estimates showed the widening of the consolidated budget deficit to -4.5% for the
2019/20 fiscal year. Gross-debt to GDP was revised slightly higher when compared to
the MTBPS in 2018, stabilising at 60.2% of GDP at 2023/24. While there was a
reduction in spending of R50.3 billion, this reduction was unfortunately countered by
State-owned Entities (SOE) bailouts.

National Treasury has provisionally set aside R150 billion over a ten-year period which
will be allocated in stages to incentivise the required reforms within the institution. Over
the medium-term, National Treasury will allocate R23 billion per year to Eskom, which
will need to be repaid. Over a three-year period, this would total to R69 billion in
financial support.

South African longer-dated bond yields rose in mid-February (on the back of the
budget) but fell again to end marginally higher for the month. Vanilla bonds
experienced negative performance for the month as reflected in the All Bond Index
which gave back -0.4% The release of the weaker than expected headline inflation
print which came in at 4% year-on-year (from 4.5% year-on-year in December), led
to a weakening of inflation-linked bonds.

The local equity market extended last month's gains with the FTSE/JSE All Share
Index falling in line with global sentiment and returning 3.4% for the month. While the
local bourse alternated between gains and losses, the index was supported by the
strong performance from the resource and rand hedge counters. The Resource 20
Index was up an impressive 8.0% while the Industrial 25 Index was buoyed by rand
weakness and returned 4.1%. The Financial 15 Index was down -2.0% while the S.A
listed Property Index erased some of last months gains to end -5.7% weaker for the
month.

Following extended trade negotiations between Washington and Beijing officials,
U.S. President Donald Trump confirmed that the U.S. would delay a set of additional
tariffs on Chinese goods that were due to take effect on 1 March 2019. This improved
risk sentiment, however, periodic spells of doubts regarding the conclusion of the
trade deal continued to cause some market angst. Concerns that the global economy
may be slowing down also lingered as the European Commission released a host of
downward revisions to its economic forecasts for several major economies in the
region.

Global central banks responded by maintaining an accommodative monetary policy
stance. The Bank of England kept interest rates unchanged, while minutes from the
January meeting held by the U.S. Fed last month reiterated the central bank's new
dovish stance. The central bank communicated it would be more flexible regarding
the shrinking of the balance sheet but gave itself some wriggle room by stating that
the current approach would be reconsidered if potential headwinds eased.
The monthly jobs numbers out of the world's largest economy came in ahead of
expectations. In the wake of the government shutdown, the report showed that the
U.S. economy added 304 000 jobs in the month of January, marking its 100th
consecutive month of jobs growth and signalling underlying strength in the U.S.
economy. With that said, the report also showed that December's job gains were
revised sharply lower while the gain in average hourly earnings remained lacklustre.
Investors kept a close eye on the latest Brexit developments as the 29 March
deadline marched closer. In Spain, parliament rejected Spanish Prime Minister Pedro
Sanchez's minority government budget proposal for 2019. Sanchez subsequently
called a snap general election and Spaniards will now head to the polls on 28 April
2019.

Overall the risk-on sentiment and the pause on interest rate hikes by global central
banks led equity markets higher. This was reflected in the MSCI Global Equity Index
which returned 3.0% for the month, outperforming the 0.2% returned by the MSCI
Emerging Market index. On Wall Street, the S&P 500 was up 3.2% and the techheavy
Nasdaq returned 3.6%. In Europe, the FTSE 100 gained 2.2% as the Brexit
deadline loomed. Global bonds traded lower in the month as mirrored in the Barclays
Global Aggregate Bond index which was down -0.5%

In the commodities market, global growth concerns weighed on the price of oil.
Fortunately, OPEC-led supply cuts and U.S. sanctions against Venezuela provided
crude with support which led to Brent Crude rallying 8.7% for the month. Platinum
was up 6.6%, while gold lagged and returned 0.2% for the month.


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Posted: 2019/02/01 (09:28:02 AM)




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