You're listening to Strictly Business Podcast with Lindsay Williams.
The South African bond market has taken a clattering since the war began.
But let's put this into context with James Turp, Portfolio Manager at 91 in Cape
Town.
Now, James, you sent me something which started like this, which was actually
quite startling.
You said March was the second worst monthly drawdown for the All Bond Index
over the last 20 years.
Not 20 months.
20 years.
So this is an historic event we've just seen.
That's right.
Thanks, Lindsay.
I mean, it's staggering, isn't it?
We sit and monitor bond markets and you go back over the last, as you say, 20 years.
The only worst single month was COVID lockdown in March 2020.
If you can recall all the way back then, all of the uncertainty and volatility.
I mean, we were going into a new era for bond markets.
The only other month that came close was Nenegate,
that firing of the finance minister in December of 2015.
It actually was down 6.67%, whereas March this year, 6.83%.
So just to put it in perspective, it's the second worst monthly drawdown, as you say,
which just shows you where we've been and what our portfolios have had to sustain.
Speaking about where we've been, again, some more context here, because the day
after the so-called Liberation Day,
just about 13 months ago, the 10-year bond, the South African 10-year bond went
to, I think,
something like 11.15%.
As I look at my screen now on Wednesday afternoon, late Wednesday afternoon, the
8th of April,
it is 8.545%.
And I think it went to 7.92 at one stage.
But anyway, the point is...
It's had a terrific run over the last 13 months, hasn't it?
Well, actually over the last year, but if you add the extra month, not so good.
Yeah, that's right.
So that compression of yields was actually, I mean, it started all the way
back in 24 post GNU,
didn't it?
And you sort of made its way lower, wobbled a bit towards the end of that
year,
and then gave us a great buying opportunity, as you say, post Liberation
Day.
where we...
to know just how attractive it was back then in April last year.
But yeah, all the way down,
we disconnected from global bond yields and actually all of that term premier
getting
reduced.
And I guess also with the benefit of hindsight,
you would say that because of those two strong years for bonds,
we were likely exposed for any correction, which did play out with this risk event.
After that, of course, other things intervened as well.
The rand in association with the bonds went stronger.
South Africa was taken off the grey list.
There was an upgrade from one of the major world rating agencies.
Things started to get better in the macro economy.
There was no more load shedding.
And just generally, things were set fair in South Africa compared to previous
years.
And here we are now with those same fundamentals, I think, but a little bit of
a wobble because...
of the war.
Now, you have said here, though history may not repeat, it rhymes, they say.
And what we can observe over the previous three significant bond market drawdowns,
compared to the one we've just experienced or are experiencing, the subsequent months
did recover.
Now, Truman, I think it was that said, there's nothing new in this world, only
the history we don't know.
So we know the history, is it going to repeat itself?
That's the million dollar question.
I think you've got to zoom out a little bit, Lindsay, and think, well, you pointed
out, so fundamentally,
not much has changed other than this energy shock that's going to introduce
higher inflation
for an undetermined period of time.
And the risk then to that is higher interest rates.
But were things to settle down, you'll have some scarring,
presumably from the higher oil prices working their way through inflation.
But then Will we recover?
And that's the big question.
And going on past history,
it certainly seems like bond markets do recover after significant drawdowns.
So we always tell investors, you know, the past isn't necessarily predicting the
future.
But I think it is fair to say if your fundamentals still line up,
that once the risk event that's affected your asset prices moves out, and when
other fundamentals get back in the direction they were, then we should see a
recovery.
And that's something that is worth investors considering,
is what the outlook looks like for those fundamental factors like inflation,
like the path of interest rates.
And we do suspect that for bond investors over time, it should normalize.
And hopefully it's prophetic that we're speaking right now because of what Mr.
Trump has said in the last couple of hours.
But we can always say he said something in the last couple of hours, but this time
quite meaningful for the oil market.
Because the oil market, whether it's West Texas you like or Brent, they're both down
about 15, 16,
17 percent in one case.
And that is terribly good news.
It's still not great news compared to where it was earlier on in the year, last
year rather, where it was around $60 a barrel at one stage.
and now still in the low
90s, it still builds the case for bonds in South Africa again, doesn't it?
Yeah, well, I mean, the correction certainly is welcome on that oil price.
You're quite right, though, from 60 to 90, that's a significant enough increase to
put inflation into the system.
But we know our central bank does look through these external shocks and wants to
see it showing up in
second round effects.
And so that is a glimmer of hope for us, though the price remains elevated,
that hopefully it washes out of the system sooner.
We have been trading headline to headline, but you're quite right.
These latest headlines do show a little more promise that we could be coming to
the end of this.
Are you saying then that we should be looking at fixed income and bonds?
We should be buying bonds at these levels because of the potential change in
fundamentals when it comes to warfare?
And having a look at fixed income funds, for example, if you're allowed to say
that.
So, I mean,
what we would say certainly is if you had money to deploy and you are thinking of a
term
investment that is suitable for something like bonds,
then you've been presented with better entry levels over the last month from
where we
were.
Still not quite as, you know, still not quite where we've been.
been.
We've recovered already quite strong today, but we're still better than where
we were a little while ago.
And if your belief is that the fundamentals will normalize here, then
yes,
it would be a good thing to consider a slow move into fixed income at these
levels.
James, thanks so much for your analysis.
James Turp is a portfolio manager at 91 in Cape Town.
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