Quarterly Commentary - Q1 2020

Market comment

March 2020 must be one of the worst and most volatile months on record, as financial markets globally responded to the economic consequences of the COVID-19 pandemic – a simultaneous demand and supply shock of unprecedented proportions. Policy responses varied across economies, but key actions have been the same: implement a lockdown to contain the health crisis and provide fiscal and monetary stimulus to support the economy. The market sell-off was widespread, as investors moved quite rapidly to increase cash holdings at the expense of risk assets. Even ‘safe-haven’ assets such as gold sold off at the height of the panic. This was despite central banks’ decisive policy action and government announcements of some of the largest economic relief packages in history.

South African equity and fixed income markets were not spared, with foreigners rushing to sell assets. The liquidity squeeze in the fixed income market forced the South African Reserve Bank (SARB) to step in and firstly cut the repo rate by 100 basis points – a magnitude of four times more than the incremental interest rate changes in recent years – and subsequently introduce an additional set of temporary measures. This was somewhat effective in stabilising the fixed income market, despite Moody’s finally downgrading the country to below sub-investment grade. Moody’s cited the lack of concrete action around structural reforms by government and massive downward revisions to growth due to COVID-19. This combination has given rise to a significantly worse fiscal outlook for the country’s overall debt trajectory, as South Africa struggles with a concrete plan to contain its debt levels.

Portfolio activity and positioning

The money market curve followed the repo rate lower, with money market rates falling by more than 100 basis points at quarter end. Throughout the quarter we continued taking advantage of a steep money market curve by investing into one-year bank paper at elevated levels. This trade was favourable for the fund, as the market had not anticipated that the SARB would cut the repo rate by as much as it did.

On the monetary front, it seems as though the SARB’s Monetary Policy Committee is primed for more cuts to the repo rate, having revised growth down by a further 2% to 4% and indicating that inflation will likely be contained within the 3% to 6% range despite the significant weakening in the currency. At quarter end, the forward rate agreement (FRA) market was pricing in further cuts of almost 100 basis points in this year.

We believe that there is a high probability that the SARB may cut the repo rate significantly in the coming months. This will ultimately depend on the extent of the recession that South Africa is likely to experience, and the policy rates that the SARB deems necessary. It is important to bear in mind that South Africa’s saving shortage requires high real policy rates to attract investors. We will therefore continue to invest into longer-term money market bank paper as opportunities present themselves, albeit at lower rates than offered in the previous quarter.

The money market portfolio maintains a high level of liquidity through call deposits and bank paper. With strong capital buffers, relatively liquid balance sheets, strong risk mitigations in place and a supportive SARB, we think that banks are in a strong position to withstand this crisis.


Written by Vaneshen Naidoo

Portfolio Manager

Vaneshen joined Granate Asset Management in December 2015 and currently manages the Money Market and Cash portfolios in the Fixed Interest Team. He joined Cadiz Asset Management in 2006 as a graduate and during this time analysed the credit and property sectors for the fixed interest and multi asset class teams. Vaneshen holds a BSc. Hons (Engineering) and M.Sc.(Engineering) from The University of Cape Town, and is also a CFA.

M.Sc. (Engineering) (UCT)
BSc. Hons (Engineering) (UCT)