SA bonds should ‘easily outperform’ inflation this year

SOUTH African bonds will probably “comfortably outperform inflation this year”, with an expected return of about 10% for longer-dated bonds.

This is the view of Ashburton Investments’ head of fixed income, Albert Botha. He says: “Over the past three years, we have seen bonds return 15.4%, 11% and 7.4% respectively. 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% in 2016 and 2017 respectively and showing a loss of 8.5% in 2018.”

He says that for 2019 yields on bonds that matured in seven to 12 years’ time offered attractive return prospects, particularly when considering South Africa’s inflation rate expectations.

“Over the past decade, bonds have returned 3% above inflation. Given the current market consensus for Consumer Price Index inflation of 5.2% for 2019, the 10% nominal return currently offered, for example, by the R2030 government bond maturing in 11 years’ time, means a prospective 4.8% after-inflation return – higher than what we have seen in a good while.”

He says there are risks facing financial markets.

“The uncertainty around how the government will deal with Eskom and the other state-owned enterprises is a major risk. Depending on the approach, this could result in a ratings downgrade for South Africa and therefore a continued drag on our local GDP growth,” Botha says.

Another factor to consider is the upcoming 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.”

Internationally, Botha says, gridlock in the British parliament over Brexit and the “continuing poor leadership” from US President Donald Trump are likely to exacerbate volatility in markets. “Given this backdrop, bonds and the fixedincome markets in general seem to be a good choice to ride out the storm,” he says.