We have undoubtedly entered a difficult period for money market funds, with the overnight repo rate at its lowest in South Africa’s history. Meanwhile, other market forces are also at work keeping money market returns low. Watch this 17-minute webinar to find out what this means for investors and to learn more about how Thalia Petousis is positioning the Allan Gray Money Market Fund (the Fund) in the current environment. You can also read some recent commentary on the Fund below.
Allan Gray Money Market Fund commentary
We have undoubtedly entered a difficult period for money market funds. The overnight repo rate of 3.5% is the lowest in South Africa’s history, and offers only a marginal uplift relative to inflation of 3.1% year on year for August 2020. In fact, the South African Reserve Bank (SARB) Governor Lesetja Kganyago has been quoted as saying that the “real repo rate” (adjusted for inflation) is already negative, given that the bank utilises a forward-looking view when determining their inflation target.
Other market forces are also at work in keeping money market returns low. Our “Big 5” South African banks have historically offered an attractive rate for 12-month fixed deposits. On average over the last decade, this rate has been 1% higher than the overnight repo rate. That said, during certain periods of market stress when local banks have sought to attract additional funding, this gap has risen to as high as 2%. In 2015, after the infamous “Nenegate” incident of the Zuma administration, our local banks offered a rate of 8.35% for a 12-month deposit versus an overnight repo rate of 6.25%. The current gap is at a historical low – a feeble 0.05% yield pick-up – with banks now offering a 12-month rate of 3.55%.
The reason for this dynamic is multifold. Local banks have benefited from cash injections during the COVID-19 pandemic as the SARB sought to assist a market crippled by illiquidity and panic. Additionally, banks have reportedly tightened their lending criteria as they forecast the heightened probability of local business failures in the near term. Local businesses are reticent to invest in new ventures given a bleak growth outlook. Banks must lend in order for them to require deposit funding, and this lack of lending has given rise to pools of excess cash which has limited their appetite to take on further deposits.
Where to from here, and will these anaemic rates persist? At their September Monetary Policy Committee meeting, a divided SARB narrowly voted to keep the repo rate unchanged. Their quarterly projection model was also used to illustrate that at least two rate hikes could be anticipated before the end of 2021. While the exact timing, quantum and path of rate hikes is uncertain, the tides will eventually turn as the economy slowly normalises.