Ashburton Investments' head of fixed income Albert Botha expects South African bonds to comfortably outperform inflation this year with an expected return of about 10% for longer dated bonds.
Said Botha,"Over the last three years we have seen bonds return 15.4%, 11% and 7.4% respectively. By comparison, equities as measured by the JSE All Share total return, have struggled over the same period returning 2.6% and 20.9% in 2016 and 2017 respectively and a loss of 8.5% in 2018."
He noted that for 2019, yields on bonds that matured in 7 to 12 years' time offered attractive return prospects, particularly when considering South Africa's inflation rate expectations.
"From January 2009 to January 2016, bonds returned 2.5% above inflation. Over the last three years they returned 3% above inflation. Given the current market consensus for SA CPI of 5.2% for 2019, a 10% nominal return currently offered for example by the R2030 government bond maturing in 11 years' time, means a prospective 4.8% return above inflation," said Botha.
"With South African equities averaging a nominal return of just over 6% per annum historically, this is a very attractive prospect.
He noted, however, that there are risks to this outcome.
"The uncertainty around how government will deal with Eskom and the other State Owned Enterprises (SOEs) is a major risk. Depending on the approach, this could result in a ratings downgrade for South Africa and therefore a continued drag on our local GDP growth.
Another factor to consider is the upcoming election.
"It's likely that the markets will view a strong result for the ANC as a mandate for President Cyril Ramaphosa which could lead to strength in our local bond market.
The international political turmoil is also likely to continue.
The gridlock in the United Kingdom parliament around Brexit and the continuing poor leadership from President Donald Trump in the United States (US) is likely to exacerbate volatility in markets around the world, especially given signs of slowing growth in the US economy.
"Given this backdrop, bonds and the fixed income markets in general seem to be a good choice to ride out the storm," Botha concluded.