spend their days thinking about macroeconomics – what is the outlook for things like inflation, growth, exchange rates, and therefore interest rates? Higher interest rates mean expectations of higher yields in the bond market, and therefore lower prices. Then they also consider credit-specific factors related to sectors, governments and companies.
Coronation Bond Fund manager Nishan Maharaj says they are predicting inflation to reach a peak of approximately 7% early next year and average just above 6% for most of the year, which is why the South African Reserve Bank increased and will continue to increase rates. On the flip side, the growth outlook is very poor and is prone to futher deterioriation, implying a very subdued rate-hiking cycle relative to history. Currently, they are seeing value in bonds with a longer maturity profile, Maharaj says.
The fund’s offshore exposure is mainly in Brazilian and Mexican government bonds, which in total account for about 4% of the 10% offshore exposure, with the rest invested in US dollardenominated debt, partly to provide a natural hedge against local duration.
Locally, it is holding senior bank debt and has some exposure to corporate debt, such as Liberty and Imperial, in addition to government bonds. “We’ve been staying away from state-owned enterprises that’ve had balance sheet problems,” Maharaj says. These include Eskom, where Coronation is concerned that the balance sheet risk is not adequately priced in. Transnet is one exception, as they feel investors are fairly compensated for risk, Maharaj says.