Over the last year, policy divergence among the largest economies has been reflected not only in their own economic performance, but also in that of other economies. A worsening trade environment is likely to exacerbate these divergences, and is a material risk to growth going into 2019. The global cyclical upswing reached its two-year mark and the pace of expansion in some economies appears to have peaked. The synchronised global growth is long gone, leaving domestic demand as the key driver. IMF global growth forecast for 2018 was projected at 3.9% in April this year, however, they will be revising this figure in October.
We are at the stage of the policy tightening cycle in advanced economies which has contributed to the build-up of financial vulnerabilities. In this peculiar setting, history suggests a higher likelihood of accidents in financial markets and recent events support this view where markets buffeted by negative headlines from Italy, Turkey, Argentina, and broader emerging markets. Although, there are some idiosyncratic risks, they are being magnified by a persistent and steady Fed tightening cycle and the European Central Bank (ECB) slowly phasing out their Quantitative Easing (QE) program.

Going into autumn, the United States (US) economy expanded at a solid 4.1% over the second quarter of 2018 and 2.9% year-on-year (y/y). Bolstered by pro-cyclical policy, the US labour market is nearing full employment, consumption is robust as wage growth picks up, and investment continues to be boosted by tax cuts, regulatory reforms, and fiscal spending. The confluence of the robust private and public sector has put the US growth on a divergent path from that of the global economy. Across the Euro-zone, growth remained steady in the second quarter of 2018 at 0.4%, while y/y growth declined to 2.1%. The European commission noted that their aggregate measure of consumer and business confidence declined to its lowest level in more than a year during September. Additionally, all of the economies in Europe will be negatively affected by rising oil prices, persistent geopolitical uncertainty, impacts of Brexit, poor fiscal discipline in countries such as Italy, ongoing
trade tensions and the shift to the populist right. However, growth projections remain strong for the area driven by countries such as Germany and the hope that the EU and UK will strike a deal for Brexit.

While the US and other advanced economies are still growing, the short-term concern in the global economy is centered in emerging countries where the growth divergence is becoming more evident. Countries such as Turkey, Argentina, Indonesia and South Africa are suffering from outflows of money, depreciation of their currency and therefore an increase in the burden of foreign currency denominated debt creating a challenging environment for the region.

As emerging markets have come under pressure in recent month amidst continued tightening of US monetary policy, growing noise and action around global trade policies and specific risks in specific countries, South Africa, with its relatively open capital account and twin current account and fiscal deficits, has not been spared. South Africa entered its first recession in the second quarter of 2018 since the global financial crisis of 2009. Although the external vulnerabilities are seen as a source of macroeconomic risk, South Africa’s latest balance of payment data was encouraging. The seasonally adjusted current account deficit narrowed markedly to 3.4% of GDP in the second quarter of 2018 from 4.6% of GDP in the first quarter. This was driven partially by an improvement in trade balance strengthening to 1.4% from a decline of 3.9% in the first quarter. Beyond the third quarter, current account dynamics will be driven fundamentally by the strength of foreign demand and the export commodity prices on the one side and by the strength of domestic demand and Brent crude oil prices on the other.

Following the relatively poor economic performance, President Cyril Ramaphosa announced that the government has formulated stimulus package focused on the reprioritisation of government spending and economic reform. However, there remain difficulties for government to reprioritise spending away from the relatively unproductive labour intensive organs of state and we expect a marginal impact to this shift in spending. In October, we look forward to the Medium-Term Budget Policy Statement (MTBPS) which will dictate the tune until February’s Budget and Moody’s Rating Agency review for South Africa. Although, the probability of a rating downgrade is minimal, Moody’s has warned that SA’s debt metrics and SOEs (stateowned enterprises) are key risks, and can lead to a change
in SA’s rating. A strong recovery in GDP growth will be difficult to achieve given ongoing constraints on the consumer and persistently weak business confidence.

Following the news that Africa’s most industrialised economy has entered a recession, the rand and the government bonds tumble, wiping away the optimism that followed in February with the new President and Finance Minister. Additionally, the crisis in Turkey and the global trade war have affected local markets through contagion and rising risk aversion. The SA benchmark 10-year bond yield has been flirting around the 9.00% level, reaching a high of 9.47% in September 2018, as foreign investors scrambled to reduce volatility in their portfolio against a backdrop of rising economic risk. With the fading of ‘Ramaphoria’ and successive decline on a month-to-month basis in business and consumer confidence, benchmark yields have risen sharply. While inflation is still within the South African Reserve Bank (SARB) target band of 3%-6%, with rising fuel prices and the recent VAT hike, the consumer is under pressure. Although the rand has significantly depreciated in value over the recent months, SARB stated that they would not respond the rand’s movements in a "targeted way" but only to the second-round effects of market shocks. SARB is still focused on its inflation-targeting mandate without government interference but stated that if South Africa experience a sustained rand weakness and it is pass-through to inflation, they will most likely have to intervene. Even with a deteriorating inflation outlook, the benchmark repo rate was left unchanged at 6.50% in September, with the governor striking a more hawkish note than in the last meeting. SARB reviewed the growth projections downwards to 0.7% in 2018 in light tighter global financial conditions and the change in investor sentiment towards emerging markets.

The Oasis Bond Fund provides exposure to a selection of xed interest instruments that have impeccable credit ratings. This would ensure that it is able to generate a steady stream of interest income at low level of risk. The portfolio is also diversied across xed interest instruments that have different maturities to provide greater consistency in the rate of return (or yield) over time.

The global economy entered 2018 with a synchronised upswing firmly underway, driven by improving manufacturing output, trade volumes and commodity prices. In January 2018, the IMF upgraded its forecasts further and now expects global economic growth to firm to 3.9% in both 2018 and 2019, after 3.6% in 2017, a pace comfortably above the 3.2% recorded in 2016, when there were widespread concerns over secular economic stagnation. The synchronised global economic upswing has led to narrower output gaps and, together with higher oil prices, has provided the basis for reflation. However, inflation increases have remained measured suggesting some economic 'slack' is still prevalent in key economies. From 0.8% in 2016, the IMF projects inflation in Developed Markets will average 1.7% in 2018 and 2.1% in 2019, in line with most central bank's target levels.

Against the backdrop of US economic upswing, the Federal Reserve has raised the Funds Rate six times since December 2015, each by +25 basis points, to reach 1.75% in March 2018. The improving job market has supported growth in disposable income and helped underpin consumer spending. A series of tax cuts have been implemented with a view of boosting investment and employment. As things stand, the plans are unfunded and will over the long-term add significantly to the fiscal
deficit. The global economy faces a number of key risks. Most importantly, the normalisation of monetary policy in developed markets, in particular the US, may cause a faster than expected tightening of global financial conditions, which could impact market valuations and increase market volatility. Steps by President Trump to add tariffs on steel and aluminium imports has led to corresponding steps by the Chinese authorities, leading to fears of an escalating 'tit-for-tat' trade war. Finally, China's high level of corporate indebtedness and lack of transparency on local government balance sheets also poses a key risk to the domestic economy and, by extension,
the global economy too.

The South African economy has continued to perform well below its long-term potential given domestic headwinds from corruption, poor governance within the
State Owned Enterprise (SOE) sector and uncertainties around the political landscape. The election of Cyril Ramaphosa as National President in February 2018 will be looked back on as a pivotal moment if he is successful in tackling deep-seated corruption and introducing growth-supportive economic policies. The 15% appreciation of the Rand since the ANC's National Conference in mid-December shows a vote of confidence by financial markets. If Ramaphosa is able to fulfil these
expectations, the stronger Rand will improve inflation outcomes by protecting the economy from rising oil prices and provide scope for the South African Reserve Bank to maintain an accommodative monetary stance.

Fiscal tightening measures announced in the February 2018 Budget, which included an increase in the VAT rate from 14% to 15%, will provide a headwind of around
0.5 percentage points to GDP growth. While the fiscal tightening and the more market-friendly Ramaphosa administration led Moody's to retain its investment grade rating and placing South Africa on a stable outlook, risks to the rating outlook remain should economic growth disappoint over the coming year. The current account deficit may have reached its narrowest point in 3Q 2017 with higher import volume growth stemming from a recovery in economic activity. In this respect, a decline in terms-of-trade is a key risk for South Africa's external position at the current juncture.

Improvements in the global economy and the rally in global equity markets as well as a shift in the local political sphere provided what seemed like a solid footing for the first quarter of 2018 for SA equities. However, the first quarter of 2018 has ended with the FTSE/JSE Index 5.9% lower mainly driven by the industrial stocks which have been dragged down by the sell-off in Naspers. Given the recent global developments in terms of trade war fears and high valuation concerns, especially
to tech stocks, we believe that investors need to seriously consider portfolio diversification as a measure of shielding their investments in an environment where uncertainty has increased.

Benchmark yields have fallen notably in the aftermath of Cyril Ramaphosa's election as ANC President in December 2017. Tough steps taken to restrain the fiscal deficit in the February 2018 Budget followed by Moody's decision to retain its investment grade rating for South Africa and switching to a stable outlook have all been supportive of bonds. The benchmark R186 yield has fallen by around 130bp to around 8.15% since November 2017. After a lengthy pause following its 25 basis point rate cut in July 2017, the South African Reserve Bank followed up with another 25 basis point rate cut in March 2018, taking the repo rate to 6.50%. Given the split 4-3 MPC vote and rising global yields, it would seem likely that South Africa is not about to enter a major rate cutting cycle, notwithstanding recent Rand strength. Amidst the volatility, our income exposure has been very well positioned to provide downside protection relative to peers. In this environment, short term increases in benchmark yields do provide us with important buying opportunities in order to maximize the risk-adjusted return of the funds over the long term.