Coronation SA Income Fund

PERFORMANCE

The Fund returned 2.79% for the quarter (Q2) versus 1.67% for the STeFI Composite, outperforming by 113 basis points (bps). Over 12 months, it returned 8.74% versus 7.07% for the STeFI Composite, staying close to its long-run cash outperformance objective. The portfolio maintained a conservative, liquidity-focused stance in high-quality money market instruments, with selective exposure to nominal and inflation-linked government bonds (ILBs). Domestic nominal bonds rallied strongly in Q2 (FTSE/JSE All Bond Index [ALBI] +7.87%), and the Fund captured part of this return through its sub-10-year duration positioning, contributing positively relative to cash.

The domestic backdrop became more challenging over Q2 as the oil price shock that emerged in Q1 fed through to fuel, transport, and services inflation. Headline CPI accelerated from 3.1% y/y in March to 4.0% in April and 4.5% in May, driven by surging fuel prices. Core inflation rose to 3.8% y/y in May, reflecting second-round effects in transport services, insurance, and communications costs.

On the growth side, the South African Reserve Bank (SARB) revised its 2026 GDP forecast to 1.2% at the May MPC meeting, reflecting weaker global growth and pressure on real household incomes. The balance of risks to growth was assessed as skewed to the downside. The 2026/27 Budget, viewed as credible upon presentation, continued to underpin market confidence with revenue outcomes tracking broadly in line with assumptions.

The global environment remained dominated by geopolitical uncertainty and its inflationary consequences. Oil prices hovered within the $90–$100 per barrel range for much of the quarter, sustaining upward pressure on global inflation. The US Federal Reserve held the federal funds rate unchanged at 3.50–3.75% at the June FOMC meeting but struck a materially more hawkish tone. The risk of Fed hikes in the second half of (H2) 2026 has increased, constraining the rand and adding upside pressure to domestic yields. The European Central Bank raised its deposit rate by 25bps to 2.25% at the June meeting, citing war-related energy prices, while the Bank of England maintained a hawkish posture.

The SARB MPC voted 4:2 at the May 2026 meeting to raise the repo rate by 25bps to 7.00%, in response to the deterioration in the near-term inflation outlook. The committee opted for a cautious, incremental approach, preserving optionality while assessing the shock’s impact. The SARB revised its average headline CPI forecast for 2026 to 4.4%, with inflation expected to peak near 4.9% in Q1 2027 before moderating to 3.1% in H2 2027 as food and fuel prices normalise. Risks to the inflation forecast were viewed as skewed to the upside. The June FOMC’s removal of rate cuts from its baseline further constrains SARB easing optionality. We currently expect a further 25bps in hikes in the near term, but the risk for further hikes remains if upside inflation scenarios, particularly a sharp rise in food prices or a protracted oil shock, materialise.

Domestic bonds delivered a strong quarter, reversing the losses of Q1. The ALBI returned +7.87% in Q2, compared with 1.67% for the STeFI Composite. Duration drove dispersion: the 1–3 year segment returned +2.10%, the 3–7 year segment +4.87%, and the 7–12 year segment +8.11%. The South African 10-year yield fell by around 89bps over the quarter, ending at 8.44% as of 30 June 2026. The rally was supported by a constructive domestic fiscal backdrop, a stronger rand, and the partial unwinding of the geopolitical risk premium that built up in Q1. Nominal bond yields remain attractive in absolute terms: the front end (R2030 at 7.74%) still offers meaningful return potential above the 7.00% repo rate.

ILBs also delivered a positive quarter, with the JSE Composite Inflation-Linked Bond Index returning +6.48%. The rally was supported by real-yield compression and meaningful inflation accrual, as rising fuel and services prices increased the carry on these indexed instruments. Real yields across the ILB curve remain structurally attractive: R210 at 3.08% and I2031 at 3.59% continue to provide valuable inflation protection within the portfolio.

FUND POSITIONING

Portfolio positioning maintained a conservative, liquidity-focused stance throughout the quarter. Nominal bond exposure remained concentrated in the sub-10-year segment, capturing part of Q2’s rally while prudently managing duration risk within the cash-plus mandate. ILBs remained a structural holding, providing both real yield carry and protection against upside risks to the near-term inflation profile. Bank credit and floating-rate note allocations remained selective: ongoing spread compression in the banking sector continued to limit the available risk premium, constraining the Fund’s overall credit exposure.

OUTLOOK

Looking ahead, the domestic fixed income backdrop has improved since Q1 but remains finely balanced. A conservative duration stance, high-quality money market exposure, and selective allocations to nominal bonds and ILBs across the sub-10-year curve are expected to generate returns above the cash benchmark and support the Fund’s cash-plus objective over the medium term.

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