December was characterised by central bank movement in advanced economies. The US Federal Reserve (Fed) lowered the policy rate by 25 basis points as anticipated by the markets. The European Central Bank (ECB) also reduced its policy rate, by contrast, the Bank of Japan (BoJ) and the Bank of England (BoE) left policy rates unchanged.

The 10-year benchmark bond yields in advanced economies experienced substantial increases, with the US yield climbing 40 basis points (bps) to close at 4.57%. Inflation expectations in the US were revised notably higher due to the anticipated policies of the incoming Trump administration, leading to the removal of two previously expected 25 bps interest rate cuts from market forecasts.

The South African yield curve bear steepened in December, with the R2030 yield rising by 13 bps and the longer-dated R2048 bond yield increasing by 26 bps. As a result, the FTSE/JSE All Bond Index (ALBI) posted a return of -0.35% for December. The 7–12 year and 12+ year maturity buckets declined by -0.24% and -0.94%, respectively, while shorter-term buckets (1–3 year and 3–7 year) delivered modest positive returns of 0.47% and 0.2% respectively.

Inflation-linked bonds delivered positive returns for December. Yields on both the longer-dated (I2050) and shorter-dated (I2029) decreased slightly. A broad-based decline in the inflation-linked curve resulted in the FTSE/JSE Inflation-Linked Index (CILI) and the Government Inflation-Linked Bond Index (IGOV) both achieving a positive return of 0.76%.

In the money market, the 3-month Johannesburg Interbank Average Rate (JIBAR) fell by 4 bps to 7.75% in December, while the 12-month JIBAR dropped by 7 bps to 8.13%. The Alexander Forbes Short-Term Fixed Interest (STeFI) index, a common benchmark for money market funds, returned 0.69% for the month.

The Rand weakened in December, closing at USD/ZAR 18.81, as global risk appetite remained subdued. Reduced expectations for US rate cuts bolstered the US dollar, which was a key driver of the Rand's depreciation against the greenback during the month. 

Looking ahead, we remain cautious amid heightened market risk aversion. We expect central bank actions, both locally and globally, to continue to shape market conditions in 2025. Although further rate cuts are anticipated, we are now expecting fewer from the US as inflation remains sticky. 

We will continue to monitor global and local political developments and inflation trends to guide our investment strategy, ensuring alignment with our long-term outlook.

The macro environment remains broadly positive for equities over bonds, with equities still pricing in lower rates. Our house view is unchanged, with US equity markets expected to broaden out as the year progresses. 

We trust you have enjoyed and benefited from this report and please do not hesitate to contact Orion Investment Managers at: info@orionim.biz should you have any questions or queries.

Sincerely,

Adrian Meager
Orion Investment Managers
Managing Director and Chief Investment Officer