Investors should also bear in mind that where the JSE in the past has acted as a useful proxy for emerging markets, as more and more emerging markets become Asia-Pacific focused, they should consider adding other emerging market exposure to achieve true diversification.
It is also worth noting that, while the local bond market is one of the few in the world that may generate positive returns for investors in 2021, this should be treated with caution and investors should rather consider taking profits or even go underweight.
Bond yields were trading around 9% in March 2020 and, following the Moody’s downgrade to sub-investment grade, these yields exploded to 13% to compensate investors for the higher risk of government default. Since then, however, yields have returned to 9%, seemingly indifferent to the fact that our fiscal situation has significantly deteriorated due to the pandemic, and that our budget deficit will be twice the size anticipated at the start of 2020. In light of this, it is highly unlikely that the local bond market will continue to trade at current levels indefinitely.
Prospects for the rand
The fact that the rand is trading below R15/$ clearly reflects international factors such as the US election outcome, vaccine developments and an abundance of liquidity. The first bump in the road, however, will be the February Budget Speech, which is likely to remind investors of our poor local economic fundamentals.
Eventually, as investors wake to South Africa’s economic reality, the rand will come under some pressure again. So, while the rand is currently enjoying the benefit of global tailwinds, it is likely to weaken during the course of the year. However, the extent of this weakening will ultimately depend on government’s progress on fiscal reforms, without which we could see the local currency head north of R18/$.
Maarten Ackerman is chief economist and advisory partner at Citadel
Article by Moneyweb