By Peter Kent, Co-Head of SA & Africa Fixed Income and Malcolm Charles, Portfolio Manager
Perfect Storm for SA investors
Malcolm Charles discusses the shifting bond market momentum in South Africa with Lindsay Williams.
The relief rally in the currency and bond market following the ANC elective conference in December was nothing short of spectacular: The SA bond market returned an impressive 5.7% for the month, followed by a respectable 5.86% in the first two months of 2018. Is further Ramaphoria justified, or has the time come to take a more defensive position where domestic bonds are concerned?
We believe there are both cyclical and secular tailwinds that should provide further support for the bond market over the short to medium term. It is also worth pointing out that despite the significant rally in domestic bonds, emerging market bond yields have fallen substantially more than ours over the last two years, suggesting that SA bonds continue to offer relatively attractive yields.
In terms of cyclical support, the relative political stability we’re enjoying following Cyril Ramaphosa’s victory means that we can finally shift our focus from the politics to the macro drivers. In particular, it means that the Reserve Bank can shift its focus to more orthodox inflation targeting, rather than having to run monetary policy on a risk management basis. As the ‘only adult in the room’ over the last few years they had to provide a steady anchor in an environment of surprise cabinet reshuffles, foreign flows, credit downgrades, instability at National Treasury and mismanagement of key state-owned enterprises.
In all of the MPC statements over the last year, the inflation risks were often to the upside on the back of unpredictable politics and downgrades and their likely negative impact on the rand. Now these risks have dissipated, which means the SARB finally has the breathing room to consider more orthodox macro drivers of monetary policy. The good news is that there is scope to ease.
Due to the SARBs prudent management of a tumultuous few years, inflation is under control in the middle of the target band, while growth – albeit better than expected and improving – is still very low and below our potential. Given this, a rate cut is unlikely to be inflationary very quickly. So growth is improving, which helps the credit worthiness of the fiscus, but not at a rate to warrant monetary tightening – in other words, we are growing at a perfect speed to support the bond market from both a credit worthiness perspective and a monetary perspective.
Over the longer term, the bond market should find further support in actual deliverables. We believe Moody’s should give us a reprieve this month, which provides Ramaphosa and his new cabinet time to implement these changes. The initial moves have been positive, but we need to see actual delivery. A positive signal, for example, would be for Eskom to come to market and successfully issue some debt again. We also need the mining charter bedded down; there is clear intent from labour, government and business – and once passed, should lead to capital investment. Money follows money, and would feed into other sectors of the economy, ultimately leading to confidence in the economy returning.
In terms of the Investec Diversified Income Fund, our flagship fixed income strategy, we have been positioned positively towards interest-rate sensitive assets, recognising that this was one of those rare opportunities where cyclical and secular aligned. We continue to hold an overweight position in bonds and SA-centric listed property.
Ironically, just as local factors are starting to gain momentum we believe more caution will be warranted over the second half of the year, as the global environment is likely to become less supportive. In this event, we hold an offshore allocation which should provide comfort that we can preserve capital. For now, however, let’s enjoy these tailwinds that are likely to continue providing positive momentum for our bond market in the months to come.
All the information contained in this communication is believed to be reliable but may be inaccurate or incomplete. Any opinions stated are honestly held but are not guaranteed and should not be relied upon. This communication is provided for general information only and for distribution only in South Africa. It is not an invitation to make an investment nor does it constitute an offer for sale. The full documentation that should be considered before making an investment, including the prospectus, key investor information documents and minimum disclosure documents which set out the fund-specific risks, are available from Investec Asset Management. Collective investment schemes (CISs) are generally medium- to long-term investments and the manager gives no guarantee with respect to the capital or the return of the funds. CISs are traded at ruling prices and can engage in scrip lending. A schedule of charges, fees and advisor fees is available on request from the manager. Additional advisor fees may be paid and if so, are subject to the relevant FAIS disclosure requirements. A feeder fund is a portfolio that invests in a single portfolio of a CIS, which levies its own charges which could result in a higher fee structure for the feeder fund. Performance shown is that of the funds and individual investor performance may differ as a result of initial fees, actual investment date, date of any subsequent reinvestment and any dividend withholding tax. Past performance is not necessarily a guide to the future. These portfolios may be closed in order to be managed in accordance with their mandates. The value of participatory interests (units) may go down as well as up. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. A higher Total Expense Ratio (TER) does not necessarily imply a poor return, nor does a low TER imply a good return. Where portfolios invest in the participatory interests of foreign collective investment schemes, these may levy additional charges which are included in the relevant TER. The ratio does not include transaction costs. The current TER cannot be regarded as an indication of the future TERs. Fund prices are published each business day in selected media. Additional information on the funds may be obtained, free of charge, at www.investecassetmanagement.com. The unit trust manager, Investec Fund Managers SA (RF) (Pty) Ltd, is registered under the Collective Investment Schemes Control Act. Investec Asset Management and Investec Investment Management Services are authorised financial services providers. Investec Conflict of Interest Policy is available on request.