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South African debt market

With the COVID-19 pandemic attracting all the headlines and focus from market participants and Central Banks alike, our sovereign credit rating downgrade seems like a distant memory.

To the astonishment of us, all our market is up close to 30%, and our bonds are attracting foreign interest again since the date Moody’s Investment Services delivered its devastating blow.

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This Bloomberg article by Robert Brand “Junk rating forgotten, investors pile back Into South Africa” from June 12th gives an excellent overview of the current state of affairs.

The country is now paying less to borrow in the local-currency than at any time in the five years before Moody's Investors Service removed its last investment-level rating on March 27th. The rand has rebounded, risk premia have returned to pre-downgrade levels, and foreign investors are streaming back into the country's bond market after a record selloff in the first five months of the year.”

That shows how global developments — specifically, the emerging-market rally sparked by global monetary and fiscal stimulus and a weaker dollar — matter more than domestic risks.”

“With the loss of the last investment rating and South Africa’s subsequent expulsion from the FTSE World Government Bond Index out of the way, the rand’s idiosyncratic risks have diminished, and the currency is once again a "bellwether for global recovery," according to Societe Generale SA.”

“Although South Africa’s fiscal position grows increasingly perilous, fiscal dynamics are likely to be less potent a rand driver than the path of the global recovery post-pandemic,” Societe Generale strategists led by Jason Daw wrote in a report. The Paris-based lender recommends an overweight position in South African sovereign credit.”

Bond yields have room to move lower as inflation slows due to low oil prices and the pandemic-induced decline in consumer demand, according to Societe Generale. Bond purchases by the central bank and the global search for yield should also support South African debt, the strategists said.

Click logos to viewBond ETFs

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Intellidex

Intellidex also showcased some noteworthy ETFs in their note “Intellidex Reviews May 2020: ETF Picks” under the Bonds and Cash section: SA’s fiscus is set to deteriorate substantially as revenue collections take a hit due to Covid-19, while the country’s expenditure is expected to remain sticky. The poor state of SOEs increases the downside risks while SA’s sovereign credit rating junk status by all three credit rating agencies bodes ill for government borrowing costs.

Given this backdrop, we gravitate towards the FirstRand US Dollar Custodian Certificate (-4.7%), which invests in US treasury bonds and offers rand hedge qualities. Our thesis, however, is weakened by the fact that international bonds are expensive due to central banks’ actions and further upside potential is limited. However, investors with access to broad emerging market bond ETFs should also consider those in a tactical strategy. When markets calm down, such bonds are likely to come back in style as money that is currently parked in safe havens starts looking for yields. For this reason, and given limited bond ETF choices, NewFunds Govi (+6.8%) can be adopted as a satellite fund. For short-term investors, usually less than a year, we maintain the NewFunds TRACI (+0.5%) as our choice.

What does EasyResearch say

The COVID-19 pandemic has seen the markets on a roller coaster ride with opportunities in abundance presenting themselves. Although the journey is far from over, bonds might be one of the allocations investors should consider when diversifying their portfolios against volatility.

Our clients

Clients have been cautious while looking for opportunities in the market, which has seen record inflows into the equity market as. Exchange Traded Funds (ETFs) have remained popular across the board and is set to continue in popularity for some time.

Conclusion

We might see uncertainty remain while central banks keep the markets afloat and until a COVID-19 vaccine is developed. But until then, investors should keep diversifying their portfolios to curb downturns and keep an eye out for opportunities in the markets.

Source – EasyResearch, Bloomberg, Robert Brand article, Moneyweb,

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Barry is a market analyst with GT247, with a wealth of experience in the investment markets. Now in his tenth year in the markets, Barry "The Beef" Dumas brings a combination of technical analysis and fundamental insights to the table

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