Photo: Leon Nicholas
Ashburton Investments’ head of fixed income, Albert Botha, expects 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, 11 and 7.4percent respectively. By comparison, equities as measured by the JSE All Share total return, have struggled over the same period returning 2.6 and 20.9percent in 2016 and 2017 respectively and a loss of 8.5percent in 2018.”

He noted that for 2019, yields on bonds that matured in 7 to 12 years’ time offered attractive return prospects, particularly when considering South Africa’s inflation rate expectations. “Over the past decade, bonds returned 3percent above inflation. Given the current market consensus for South African consumer price index of 5.2percent for 2019, a 10percent 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 for a good while,” said Botha. “With South African equities averaging a nominal return of just over 6percent per annum historically, this is a very attractive prospect.

He noted, however, that there are risks to this outcome.

“The uncertainty around how the government will deal with Eskom and the other State Owned Enterprises 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 gross domestic product 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 market.”

The international political turmoil is also likely to continue.

The gridlock in the UK parliament around Brexit and the continuing poor leadership from President Donald Trump in the US is likely to exacerbate volatility in markets around the world. Ashburton Investments

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