BUSINESS OF

INVESTING

SA BONDS ‘WILL BEAT INFLATION’

ASHBURTON Investments’ head of fixed income, Albert Botha, expects South African bonds to outperform inflation comfortably this year, with an expected return of about 10 percent for longerdated bonds.

Said Botha: “Over the past three years, we have seen bonds return 15.4, 11 and 7.4 percent. By comparison, equities, as measured by the FTSE/JSE All Share Total Return Index, have struggled over the same period returning 2.6 and 20.9 percent in 2016 and 2017 and a loss of 8.5 percent in 2018.”

He said for 2019, yields on bonds that matured in seven to 12 years 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 the Consumer Price Index of 5.2 percent for 2019, a 10 percent nominal return offered by, for example, the R2 030 government bond maturing in 11 years 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 6 percent a year historically, this is a very attractive prospect.”

He said, however, that there were risks to this outcome. “The uncertainty around how the government will deal with Eskom and other state-owned enterprises is a major risk. Depending on the approach, this could result in a ratings downgrade and thus continued drag on our local gross domestic product growth.

“Another factor to consider is the 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.” | Ashburton Investments