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SA’s fading political risk

The story that the bond market is telling.
President Ramaphosa's 'new dawn' is helping the bond market. Picture: Bloomberg News

In the first quarter of 2018 the South African bond market gained an impressive 8.05%. What makes this performance even more noteworthy is that the JSE was down 5.97% over the same period.

This rally is very much an indication of the changing political and economic dynamics in the country. It started just before the ANC conference in December, at which Cyril Ramaphosa was elected party president, and has gained momentum based on what has followed since.

Yields on 10-year South African government bonds have fallen sharply from 9.27% on the day before the ANC meeting to their current levels around 8.05%. This has pushed prices higher.

“What’s happened is the pricing out of political risk and everything associated with that,” says Jonathan Myerson, head of fixed interest at Granate Asset Management. “It started at the conference and gradually developed as things were being clarified and we could see a move away from uncertainty.”

How it all changed

The head of fixed income at PSG Asset Management, Ian Scott, says that there were a number of key factors that have driven this move. The first was Ramaphosa’s election, followed by the February budget that offered important fiscal consolidation.

“The VAT increase was also good for bonds because if you think of government finances, whatever doesn’t come from taxes has to be found in the bond market,” says Scott. “So higher VAT reduces supply.”

In early March National Treasury also cut the size of its weekly bond auctions by a third. Government is therefore borrowing a lot less than it was.

“Most people in the market thought that Treasury would reduce the size of the auctions, but what surprised us is how soon they did and the size of the cut,” says Myerson. “It is quite an aggressive move, so maybe they are bullish about their ability to cut expenditure even further.”

Moody’s decision to not only keep South Africa’s credit rating at investment grade, but to also improve the outlook to stable was also very supportive. Although yields didn’t move significantly since the market was expecting the decision to keep the rating steady, the change in outlook was surprising and further supported the growing positive sentiment.

“Finally you had the South African Reserve Bank (Sarb) moving to a less hawkish stance and cutting rates last week,” says Scott. “So you have had a confluence of all these factors that are really bullish.”

This has also happened at a time when the global environment is favourable for emerging market assets.

“We are seeing economic growth across the US, Europe, China, Japan, and that is good for commodity prices and emerging market currencies,” says Scott. “A stronger rand supports lower inflation, and that in turn supports lower bond yields.”

Risk premium

All of this has led to a point where Myerson believes that the risk premium that was being offered in local government bonds throughout 2017 and most of 2016 has now been unwound.

“At current levels, our bond valuation models suggest that the local bond market is offering no risk compensation,” he said in a recent note to clients.

This doesn’t mean that he believes everyone should be dumping their bond holdings, but by Granate’s valuation methods South African government debt now looks slightly expensive.

“What we have to learn over and over again, is that foreigners looking at emerging markets want something a bit special,” Myerson says. “They want a crisis to give them an opportunity to get in. If I look at basic valuation metrics against other emerging markets on a rolling basis, I don’t think South Africa is particularly appealing to them right now. Most of the appeal has been priced out.”

That doesn’t mean that foreigners believe South Africa has normalised entirely, but they don’t see the same level of risk any more. This is clear if one compares the 8.05% on local 10-year government bonds to the 12.35% being offered on 10-year bonds in Turkey.

Scott however still believes that there is value for South African investors looking for above-inflation returns.

“We take a medium- to longer-term view of inflation, and we believe that the Sarb is credible in sticking to its inflation mandate,” he explains. “In fact it wants to be more hawkish. In the past it was targeting the upper end of the inflation band, around 6%, but it has now clearly stated that it wants to move inflation expectations closer to the midpoint, around 4.5%. If it can engineer inflation expectations lower and you get closer to 5% for some time, your 10-year bond yield of 8% is giving you a real return of 3%, and that is not bad.”

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All good and well if you ignore EWC noise

Thank you Patrick for sharing this good news – albeit very rare – about SA.

The country is most certainly not yet out of the doldrums and a lot of hard work remain to get back (if ever) to where it should be, but this is good.

(I wonder where those negative anti-SA people are – living in hovels in some first world countries yearning for the comfortable yet dangerous but exciting life back where they once called home.)

If I could, I would suggest:
Never underestimate the hostility of your environment;
focus on good and positive news;

Your comment of those wishing to move or have is condescending

And those that condencend on others, generally are envious

As for hovels, many down under from SA don’t. They are safe, encouraged and happy. This is the same for those would left for Europe

If it was so “dandy” here, I’m sure many would be on their way back

“They are safe, encouraged and happy” – I don’t think they are that happy having spent 10 years overseas myself. Grumpy would be more accurate.


Kindly elaborate more for us….pros & cons / likes & dislikes. If I recall correctly you lived in the UK for 10 yrs?

(Saw a You Tube vid of ex-South African 4×4 expert, Andre StPierre White…who moved to the UK, and found life unsatisfactory, but then loved living in Aus. Hilarious. Got to watch it.)

Accepted, one has to stay positive irrespective where one lives on the globe (or flat earth 😉

However, probably every one of my emigrated clients who I have contact with, doesn’t regret the move to UK, NZ, Canada, Oz (…perhaps one person out of the bunch, telling me living in New York is nowhere near the glam one sees on TV/Hollywood. Life is harder than imagined. Only one stand-out personal anecdote…the remainder are happy they emigrated, and few look back)


Confirmation bias

I think the decision about whether or not to leave SA depends on personal preference because every country has its good points and bad points.

If you are the type of person who lives for moment, is not sensitive to aggression, doesn’t feel easily threatened and can handle the stress of constant chaos, then SA could offer you a lifestyle of pleasure, natural beauty and luxury that you probably won’t get in any other country. You should continue to enjoy your high risk, high reward option in SA, knowing (as you always have) that it might one day be over.

If you prefer a calm, predictable environment that always works as it is expected to, is orderly and is far less hostile, the SA is probably not an option for you. If you consider yourself to be more a more patient person who can handle the stress of monotony and tedious, repetitive tasks, then there is a better life out there for you in another country, so take the plunge (short term pain, long term gain).

When the Oppenheimers and SAB sold out and the Gold Standard dropped, SA,s credibility as an economic powerhouse was lost. It will never return to what it was because of this and the fact that we are now just another African country with unreliable political stability.
That being said – I’m not sure I would want to be anywhere else….
So let’s make a go if it and live honest and productive lives…we still have an amazing country and a new dawn worth fighting for.

….and hence my view for years that the USD/ZAR exchange rate is en-route to 10 ish

Would you mind to quantify that?

S’African society has become CONDITIONED to accept almost weekly (service delivery) protests somewhere, which temporarily blocks off access routes to towns (as if in a civil war). The so-called “new normal”! Hogwash! Not going to accept it.
The constant vigilance (..a function of fear) to protect one’s belongings (or life). People living in informal areas have it the worst crime-wise.

Everyone is delighted for the positive direction the new ANC leadership is taking SA. We are far from ‘out of the woods’…we’ve just stopped going in deeper.

The problems of SA remain: a largely uneducated voter base (to which the ruling party or EFF will try to please). The masses are still poor, and the gap between wealthy and poor keeps widening…at what point will it be untenable? (if it’s not already). Crime (violent & white collar) unacceptably high. The whole SA society (all creeds) are backsliding….one witness it the way people drive…the increasing lack of driving etiquette right up to careless & intentionally reckless driving.

But all these socio-political problems will fade into insignificance, as its recently reported that SA could run out of water beyond 2030, with a 17% shortfall estimated (multitude of reasons, from water mismanagement to ongoing climate change). A person who relocated to NZ uttered “I can’t live in a country where it’s normal to pray for rain”. Good news for the local drilling business….see, I end off on positive note 😉

What’s happened to Robert in Sydney.Haven’t heard from him in ages.Usually by now he would have made 3 comments on this article.Does anybody know if he’s ok!

He’s still alive and well and trash-talking on Twitter, as per usual.

And so it happened that the value of the article got side-tracked and lost by pro-and anti-emigration comments. Interesting.

End of comments.





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