CAPE TOWN – Ashburton Investments' head of fixed income Albert Botha said on Thursday that he expected South African bonds to comfortably outperform inflation this year with an expected return of about 10 percent for longer-dated bonds.
Said Botha: "Over the last three years we have seen bonds return 15.4 percent, 11 percent and 7.4 percent respectively. By comparison, equities as measured by the JSE All Share total return, have struggled over the same period returning 2.6 percent and 20.9 percent in 2016 and 2017 respectively and a loss of 8.5 percent in 2018."
He noted that for 2019, yields on bonds that matured in seven to 12 years' time offered attractive return prospects, particularly when considering South Africa's inflation rate expectations.
“Over the past decade, bonds returned 3 percent above inflation. Given the current market consensus for SA CPI of 5.2 percent for 2019, a 10 percent nominal return currently offered for example by the R2030 government bond maturing in 11 years' time, means a prospective 4.8 percent return above inflation – higher than what we have seen a good while,” said Botha.
With South African equities averaging a nominal return of just over 6 percent per annum historically, this is a very attractive prospect.
He noted, however, that there are risks to this outcome. "The uncertainty around how government will deal with Eskom and the other State Owned Enterprises (SOEs) is a major risk. Depending on the approach, this could result in a ratings downgrade for South Africa and therefore a continued drag on our local GDP growth."
Another factor to consider is the upcoming election. "It's likely that the markets will view a strong result for the ANC as a mandate for President Cyril Ramaphosa which could lead to strength in our local bond marke," said Botha.
The international political turmoil is also likely to continue.
The gridlock in the United Kingdom parliament around Brexit and the continuing poor leadership from President Donald Trump in the United States (US) is likely to exacerbate volatility in markets around the world, especially given signs of slowing growth in the US economy.
"Given this backdrop, bonds and the fixed income markets in general seem to be a good choice to ride out the storm," Botha concluded.