‘In tough times, buy government bonds’

With SA Inc under siege now is the best time to buy government bonds.
That is the advice from PSG Asset Management, which presented its Summer 2018 Update at Port Elizabeth’s Boardwalk Hotel on Wednesday.
PSG fund manager Tyron Green said the company’s approach was to invest in unpopular parts of the market where negative sentiment was more likely to result in mis-pricing of attractive opportunities.
“This is the case for assets primarily exposed to the South African GDP – the so-called SA Inc shares, and South African government and state-owned entity bonds,” he said.
These assets had sold off along with the assets of other emerging markets as investors withdrew from countries perceived to be risky.
Political and economic uncertainty underscored by fears of a further credit downgrade had compounded SA-specific concerns.
Both domestic and foreign investors had shunned local markets, he said.
Using a graph, fund manager Lyle Sankar showed how “the long end of the government bond curve is offering compelling after-inflation yields. In fact, 20-year bonds are yielding over 10%.”
The graph also illustrated how often the yield of 20-year government bonds had been at certain levels since the SA Reserve Bank introduced inflation targeting in 2003 and the conclusion was key, he said.
“Over this period, 20-year government bond yields have only been higher 3% of the time.”
Sankar said the high interest rate offered on government bonds was partly because they “may already be priced for junk” by the market.
“So whether we are downgraded by Moody’s or not becomes less significant, and as a buyer of government bonds you are in a safer space.”
PSG’s forecast of SA’s odds of weathering the next rating from Moody’s – the only rating agency that had not consigned SA’s investment potential to junk – were good.
But whatever happened, the impact on asset prices might be less significant than the market expected, he said.
“South African credit spreads already trade in line with the other sub-investment grade countries and our bond market has seen significant outflows from foreigners.
“There is therefore a possibility that a downgrade has already largely been priced in.”
Green said the SA market was clearly tricky and flooded with political noise, uncertainty and negative sentiment at the moment.
“There are a lot of reasons to run but fantastic investment opportunities arise from fear.”
Moreover, the change in political leadership spearheaded by Cyril Ramaphosa taking over from Jacob Zuma and the appointment of Pravin Gordhan as public enterprises minister and his firm stance on ailing state-owned enterprises were good signs, he said.
“Combined with that, there are a lot of eyes on corruption, the investment message is going out overseas and locally and there is a new emphasis on public-private partnerships.
“These things all point to a positive trajectory for the country and the SA market.”

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