South African bonds poised for gains af­ter worst year on record

The Pak Banker - - MARKETS/SPORTS -

Ham­mered by ris­ing in­fla­tion, a cur­rency slump and credit down­grades, South African bonds suf­fered the worst year on record in 2015. That makes them a bar­gain now, ac­cord­ing to in­vestors in­clud­ing Global Evo­lu­tion.

Govern­ment se­cu­ri­ties gained 3 per­cent in Jan­uary, out­per­form­ing stocks and cash, ac­cord­ing to data com­piled by Bloomberg. That's a turn­around from last year, when rand bonds lost 3 per­cent, the most since at least 1998, when records be­gan, and only the se­cond time since then that they didn't make money, ac­cord­ing to Bank of Amer­ica Mer­rill Lynch in­dexes. In dol­lar terms, the loss was 28 per­cent, the most out of more than 30 emerg­ing-mar­kets af­ter Brazil. South African yields soared to near record highs in De­cem­ber af­ter Pres­i­dent Ja­cob Zuma fired his fi­nance min­is­ter, rais­ing ques­tions about his com­mit­ment to fis­cal tar­gets at a time when Africa's most in­dus­tri­al­ized econ­omy is grap­pling with low com­mod­ity prices and the prospect of ris­ing rates in the U.S. The South African Re­serve Bank demon­strated its com­mit­ment to sub­due in­fla­tion when it raised its pol­icy rate last week. Now in­vestors are look­ing to new Fi­nance Min­is­ter Pravin Gord­han for re­as­sur­ance on debt and spend­ing.

"I be­lieve that the sell-off is over­done, and see good value in both rates and the cur­rency," Lars Peter Nielsen, who helps over­see $2.5 bil­lion at Kold­ing, Den­mark-based Global Evo­lu­tion, said in an e-mailed re­sponse to ques­tions. "I am sure that Gord­han knows the coun­try's fis­cal stance is a huge con­cern for in­vestors. De­liv­er­ing a strong bud­get is the most im­por­tant thing in the short term." Yields on bench­mark govern­ment bonds due Dec. 2026 climbed 9 ba­sis points to 9.3 per­cent by 11:50 a.m. in Jo­han­nes­burg. Yields dropped 41 ba­sis points in the pre­vi­ous two trad­ing days af­ter the cen­tral bank raised the bench­mark in­ter­est rate by half a per­cent­age point to 6.75 per­cent on Jan. 28, mov­ing away from a grad­ual ap­proach of tight­en­ing in moves of 25 ba­sis points at a time. The rate is down 106 ba­sis points from a seven-year high of 10.36 per­cent on Dec. 11.

While South African debt is "fairly priced" given the eco­nomic chal­lenges, yields may "grind lower" af­ter the bud­get, ac­cord­ing to Stan­dard Bank Group Ltd., the na­tion's big­gest len­der by as­sets. Fair value for the Dec. 2006 bond yield is 9.2 per­cent, ac­cord­ing to Stan­dard Bank's cal­cu­la­tions, drop­ping to 9.1 per­cent by year-end, strate­gists in­clud­ing Wal­ter de Wet wrote in a re­port on Jan. 28. Pol­icy mak­ers have been in a bind since last year as in­fla­tion pres­sures mounted and eco­nomic growth slowed. The cen­tral bank ex­pects in­fla­tion, which ac­cel­er­ated to 5.2 per­cent in De­cem­ber, to av­er­age 6.8 per­cent this year and re­main above its tar­get band un­til 2017, while it low­ered its growth fore­cast for this year to 0.9 per­cent from 1.5 per­cent.

Gord­han, who was pre­vi­ously fi­nance min­is­ter from 2009 to 2014, has said the govern­ment will have to make "some tough de­ci­sions," and pledged to stick to spend­ing ceil­ings. "There's go­ing to be a strong im­pe­tus from the Re­serve Bank and Trea­sury to re­build some of the cred­i­bil­ity that was dam­aged quite se­verely in De­cem­ber," Rashaad Tayob, a Cape Town-based port­fo­lio man­ager at Abax In­vest­ments, which over­sees about $4.6 bil­lion, said.

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