Better prospects for SA fixed interest in 2014
28 February 2014 - Coronation Insights
Despite a turbulent start, 2014 should be a rewarding year for investors in South African fixed interest assets, according to Coronation Fund Managers.
Emerging markets were hit by an extended selloff in January as global investors reacted to the US Federal Reserve’s decision to scale back its massive stimulus programme. The exodus of capital highlighted the vulnerabilities of some countries; particularly those with precarious current account and fiscal deficits, like South Africa. An unexpected interest rate hike at the end of January intensified the slump in the domestic fixed interest market.
Coronation’s asset allocation funds were well positioned heading into the January selloff, with relatively undersized investments in local equities and government bonds and high exposure to offshore equities and domestic cash. Coronation has since started to buy local government bonds, listed property and some interest-rate sensitive stocks for its funds.
The emerging market rout provided a much-needed adjustment to the local fixed interest market to better reflect its underlying fundamentals, says Nishan Maharaj, who with Coronation’s Head of Fixed Interest, Mark le Roux, manage the flagship Coronation Strategic Income Fund*. “The selloff has removed a layer of uncertainty and volatility, leaving South African government bonds at more attractive levels.”
The domestic fixed interest market has now discounted another five interest rate hikes of 50 basis points each, a clear overreaction to the surprise rate increase in January, says Le Roux.
Against the backdrop of continued economic stress and subdued credit extension, Reserve Bank governor Gill Marcus has indicated that real interest rates (a repo rate exceeding inflation) are undesirable. With consumer inflation expected to peak at around 6,6% in the final quarter of this year, only three more hikes of 50 basis points each seem likely, according to Le Roux.
South Africa’s twin deficit predicament is also expected to moderate over time as the rand, down 40% over the past two and a half years, acts as a pressure valve to remove some of the strain in the economy.
The trade balance – the difference between SA’s imports and exports – has already showed the first signs of a slow improvement as the weak rand discourages imports and exports start to pick up. This dynamic will eventually feed through to the current account deficit, which should narrow over the next few quarters, says Maharaj.
There is also an indication that government is at last heeding the calls of rating agencies to curb overspending, specifically on wages, and address the fiscal deficit.
Given the extent of the negativity already priced in, the balance of probability is that the rand will strengthen, not depreciate, from current levels, contends Maharaj.
While global assets remain a preferred asset class and the Coronation Strategic Income Fund’s underlying international investments have not been scaled down, some of its overseas currency exposure has now been hedged to lock in gains following the depreciation of the rand.
In addition, the fund has increased its exposure to longer-dated bonds, and value is seen in negotiable certificates of deposits (NCDs) over three and five years as well as in longer-dated corporate bonds.
Following a sharp correction in domestic listed property at the start of the year, these investments are also gradually being added to the portfolio, with the stock selection shifting from higher-yielding stocks to higher-quality stocks. Distribution growth prospects remain solid at above 7% over the next twelve to eighteen months, says Anton de Goede, manager of the Coronation Property Equity Fund and member of the fixed interest investment team.
All things considered, 2014 should be a better year for fixed interest assets, says Maharaj. “The market has already priced in a lot of bad news.”
*The flagship Coronation Strategic Income Fund, which aims to provide a higher level of income with greater diversification than a traditional money market or pure income fund, has outperformed cash by, on average, 3% per annum since its launch in 2001. Performance quoted for the period ending 31 December 2013.
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Notes to Editors
About Coronation Fund Managers
Coronation Fund Managers Limited is one of southern Africa’s most successful third-party fund management companies. As a pure fund management business it provides individual and institutional investors with expertise across Developed Markets, Emerging Markets and Africa. Clients include some of the largest retirement funds, medical schemes and multi-manager companies in South Africa, many of the major banking and insurance groups, selected investment advisory businesses, prominent independent financial advisors, high-net worth individuals and direct unit trust accounts. Coronation is 25% staff-owned, have offices in Cape Town, Johannesburg, Pretoria, Durban, Gaborone, Mbabane, Windhoek, London and Dublin and are listed on the Johannesburg Stock Exchange. As at the December 2013 quarter-end, assets under management total R522 billion.
All information and opinions provided are of a general nature and are not intended to address the circumstances of any particular individual or entity. Coronation is not acting and does not purport to act in any way as an advisor. Any representation or opinion is provided for information purposes only. Collective Investment Schemes in Securities (Unit trusts) are generally medium to long term investments. The value of participatory interests (units) may go down as well as up and past performance is not necessarily a guide to the future. Coronation Fund Managers will not be held liable or responsible for any direct or consequential loss or damage suffered by any party as a result of that party acting on or failing to act on the basis of the information provided in this document. Coronation Asset Management (Pty) Ltd is an authorised Financial Services Provider (FSP no. 548).