Futuregrowth: SA bonds good value

After a recent spike in SA bond yields to record highs, it now sees some value in the market, says the country’s biggest fixedincome asset manager, Futuregrowth. Due to the extent of a dramatic selloff in March, together with significant rand depreciation, SA government bonds now offer relatively good value, Futuregrowth believes.

After a recent spike in SA bond yields to record highs, it now sees some value in the market, says the country’s biggest fixedincome asset manager, Futuregrowth.

Due to the extent of a dramatic sell-off in March, together with significant rand depreciation, SA government bonds now offer relatively good value, Futuregrowth believes.

“While our investment theme most certainly remains negative in light of unfolding events, market valuation has kept abreast of these developments. Our fair value and other relative value estimates clearly point to significant value in both nominal and inflation-linked bond markets,” the Cape Town-based fund manager said in a note.

“The market has moved far enough away from our fair value estimates to enable us to focus on accumulating risk in the form of longer-dated bonds.”

Futuregrowth does, however, note that risk does remain, from a flow perspective, due to the expected enforced selling by passive foreign fund managers following the exclusion of SA from the World Government Bond Index (WGBI).

The effects of the Covid-19 pandemic on the global economy coupled with SA’s dire economic growth outlook has seen foreign investors dump SA government bonds, with most of the outflows happening in March, prior to Moody’s Investors Service’s decision to downgrade the country to subinvestment grade.

The move by Moody’s will see SA being excluded from the WGBI from the end of April, with the result that due to their mandates a number of pension funds invested in SA bonds will have to move their money elsewhere.

Negative sentiment in March pushed bond yields, which move inversely to their price, to record levels, with the R2030 peaking at 12.42% on March 23, from just more than 9% at the end of February.

“We’ve opted to focus on our estimate of fair value and, in our collective mind, the market at current levels has discounted enough bad news to allow us to cautiously and incrementally add risk to our funds,” Futuregrowth said.

Bonds are an important indicator of investor sentiment towards a country, representing loans made by investors to the government. The proportion of local bonds held by foreigners slumped to 34% in March, its lowest level since reaching 33.6% in February 2016, according to data from the National Treasury.

By 5.50pm on Wednesday the yield on the R2030 was three basis points higher at 10.97%. At the same time the rand had firmed 0.56% to R18.1696/$, 0.84% to R19.7506/€, and 0.19% to R22.5259/£. The euro had weakened 0.19% to $1.0868.

MARKET HAS MOVED FAR ENOUGH FROM OUR FAIR VALUE ESTIMATES TO ENABLE ACCUMULATION OF RISK IN FORM OF LONG-DATED BONDS