Heading south or finding true north? South Africa embarks on the next leg of its journey

Peter Kent unpicks South Africa’s winding political and economic path of recent years – culminating in a cabinet reshuffle in August. As the country embarks on the next leg of its journey, Peter reflects on the investment case for South African fixed income.

Aug 25, 2021

8 Minutes

Peter Kent
Peter Kent unpicks South Africa’s winding political and economic path of recent years – culminating in a cabinet reshuffle in August. As the country embarks on the next leg of its journey, Peter reflects on the investment case for South African fixed income.

The fast view

  • In recent years the investment case for South African fixed income has oscillated between ‘too cheap to ignore’ in a yield-starved world to ‘structurally improving and interesting’.
  • Although recent unrest has severely tested the latter thesis, it has also served as a catalyst for a cabinet reshuffle under a President who is determined to forge a sustainable path. This could herald a definitive shift in the right direction.
  • Key considerations for investors include whether the shake-up of the country’s security governance draws a line under the recent unrest, as hoped.
  • Evidence of real progress on economic reform is also vital for the structural investment case; investors should monitor how effectively the new Minister in the Presidency delivers on his mandate of speeding up essential reforms.
  • Fiscal discipline and spending in the right places under the new Minister of Finance would be another key indicator of positive structural change.
  • South African asset valuations remain attractive, in our view. Although the structural investment case isn’t as good as it was a few months ago, we think it’s a lot more promising than in many periods over the last decade, thanks to an in-built economic resiliency and determined President.

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Specific risks
Default: There is a risk that the issuers of fixed income investments (e.g. bonds) may not be able to meet interest payments nor repay the money they have borrowed. The worse the credit quality of the issuer, the greater the risk of default and therefore investment loss. Derivatives: The use of derivatives may increase overall risk by magnifying the effect of both gains and losses leading to large changes in value and potentially large financial loss. A counterparty to a derivative transaction may fail to meet its obligations which may also lead to a financial loss. Interest rate: The value of fixed income investments (e.g. bonds) tends to decrease when interest rates rise. Emerging market (inc. China): These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems.

General risks
All investments carry the risk of capital loss. The value of investments, and any income generated from them, can fall as well as rise and will be affected by changes in interest rates, currency fluctuations, general market conditions and other political, social and economic developments, as well as by specific matters relating to the assets in which the investment strategy invests. If any currency differs from the investor’s home currency, returns may increase or decrease as a result of currency fluctuations. Past performance is not a reliable indicator of future results.

Authored by

Peter Kent
Co-Head of SA & Africa Fixed Income

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