South African bonds poised for gains after worst year on record
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.