Last week’s Medium-term Budget Policy Statement delivered by Finance Minister Tito Mboweni did not deliver significant surprises and was largely in line with market expectations in terms of overall deficits and borrowing requirements.
This is the view of Old Mutual Investment Group portfolio manager John Orford who adds that potentially higher issuance of government bonds in coming years might weigh on longer-dated bond yields. This is likely to keep real yields high and the yield curve steep until growth picks up significantly or domestic reforms, including cutting the wage bill, become actions rather than policies.
“South African bond yields have already discounted the weak fiscal position with the South African yield curve very steep – longer-dated bonds are much higher than shorter-dated bonds.” He explains. “Nominal yields are high relative to cash yields, and relative to expected inflation and inflation-linked yields in South Africa, remain high compared to global real yields. For example, South African inflation-linked bonds’ offer an after-inflation yield of 4.5%, which compares to the negative -0.7% offered by US inflation-linked bonds.”
He goes on to say that of course, there is risk in South African bonds given the rising debt to GDP levels and weak growth, but with a real yield, very high investors get some compensation for this risk. “This is hardly the case in the US and most developed economies where investors receive no reward despite facing a considerable risk of rising yields in the coming years.”
Zain Wilson, Investment Strategist for Old Mutual Investment Group believes that as we move out beyond the recovery in the next 12 months, asset allocation will be guided by how relative valuations have shifted, as well as changes in the global environment and our assessment of how successful government has been in executing their plans announced in the Medium-term Budget to rein in spending and implement policies to support the economy’s growth potential.