Ninety One, the asset management giant spun out of Investec in 2020, expects global and SA equities to provide strong returns over the next five years despite their recent sell-off but is betting on local government bonds for a steady income stream in the nearer term until market volatility eases.
The MSCI world index is down about 16% so far this year after Russia’s invasion of Ukraine and aggressive monetary tightening by central banks worldwide amid accelerating global inflation.
SA’s biggest listed asset manager says local investors should appreciate the resilience of the domestic economy. While that somewhat surprising resilience makes Ninety One bullish on the outlook for SA bonds in the nearer term, it also expects “select” local and international equities in its portfolios to provide investors with solid returns over the next five years, though its preference is for global equities.
“The investment case for SA bonds is just leagues ahead of most other emerging markets,” said Peter Kent, co-head of SA and Africa fixed income at Ninety One. “Our politics can be noisy and scary but the direction on that front is marginally positive, as is our fiscal trajectory.
“While inflation is slightly negative, the Reserve Bank is on top of it, and with our 10-year bonds yielding close to 10% it makes for a very compelling investment case.”
Despite worsening geopolitical tensions, rising interest rates and a sell-off in local and international equity markets, the rand has held reasonably steady and is trading at R15.55/$ while 10-year SA bond yields have eased back to about 9.72% as global risk aversion has moderated in the past month.
Outlook
Despite a series of hard lockdowns in cities across China, the biggest buyer of SA’s commodity exports, and the war in Ukraine disrupting global supply chains and raising the prospect of global food shortages, SA has remained relatively unscathed.
S&P Global Ratings even sprang a positive surprise on May 20 when it lifted the outlook on SA’s sovereign credit rating to positive, highlighting the country’s favourable terms of trade, the difference between the price of exports relative to the price of imports.
The ratings agency said the good prices SA is earning on its commodity-led exports will support the fiscus, alleviating a government debt burden that has threatened to sink the nation’s sovereign credit rating further into junk territory.
“We all tend to get a bit downbeat on SA but what is remarkable if you think of Covid-19 and what’s just happened in Ukraine is the internal resilience of our country.
“Our national savings pool was able to fund the deficits we were forced to run because of Covid-19 ... and if you look at the Russia-Ukraine situation ... our terms of trade actually improved thanks to our commodity exports,” said Kent.
“The rand has been fairly well behaved compared with other emerging-market currencies, and SA bonds have actually outperformed.”
While Kent does not discount the risks of investing in SA bonds, such as the potential for a currency slump or a dramatic fiscal deterioration, he argued that their yield is sufficient compensation relative to even those of certain industrialised nations.
For example, with inflation running at an annual 5.9% in April, investors in 10-year SA bonds are still earning a positive real yield of about 3.82%, whereas the 2.75% nominal yield available from 10-year treasuries leaves a negative real yield of over 5.5% once US inflation of 8.2% is factored in.
Ninety One multi-asset portfolio manager Clyde Rossouw said this is why he prefers local bonds to SA bank stocks, which he said are “only going to make money for you in the current economic cycle” through the so-called endowment effect, a term describing the enhanced profits banks make on their loan books when interest rates rise.
“Outside the endowment effect it’s very hard to construct an investment case based on strong balance sheet growth for SA banks,” said Rossouw.
“While we understand the fiscal constraints in SA and the risk that could pose to domestic bonds, we feel that at least you’re being offered a reasonable yield and even if the status remains for the next six to 12 months, you’re pocketing close to 10%.”
Rossouw’s favoured asset class over a five-year investment horizon is still offshore stocks. “Over the next five years, we expect global equity to be the top-performing asset class, with annualised returns in rand higher than 10% per annum on average,” he said.
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