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You're listening to Strictly Business
Podcast with Lindsay Williams.

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The South African bond market has taken a
clattering since the war began.

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But let's put this into context with James
Turp, Portfolio Manager at 91 in Cape

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Town.

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Now, James, you sent me something which
started like this, which was actually

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quite startling.

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You said March was the second worst
monthly drawdown for the All Bond Index

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over the last 20 years.

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Not 20 months.

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20 years.

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So this is an historic event we've just
seen.

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That's right.

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Thanks, Lindsay.

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I mean, it's staggering, isn't it?

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We sit and monitor bond markets and you go
back over the last, as you say, 20 years.

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The only worst single month was COVID
lockdown in March 2020.

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If you can recall all the way back then,
all of the uncertainty and volatility.

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I mean, we were going into a new era for
bond markets.

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The only other month that came close was
Nenegate,

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that firing of the finance minister in
December of 2015.

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It actually was down 6.67%, whereas March
this year, 6.83%.

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So just to put it in perspective, it's the
second worst monthly drawdown, as you say,

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which just shows you where we've been and
what our portfolios have had to sustain.

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Speaking about where we've been, again,
some more context here, because the day

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after the so-called Liberation Day,

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just about 13 months ago, the 10-year
bond, the South African 10-year bond went

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to, I think,

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something like 11.15%.

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As I look at my screen now on Wednesday
afternoon, late Wednesday afternoon, the

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8th of April,

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it is 8.545%.

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And I think it went to 7.92 at one stage.

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But anyway, the point is...

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It's had a terrific run over the last 13
months, hasn't it?

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Well, actually over the last year, but if
you add the extra month, not so good.

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Yeah, that's right.

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So that compression of yields was
actually, I mean, it started all the way

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back in 24 post GNU,

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didn't it?

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And you sort of made its way lower,
wobbled a bit towards the end of that

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year,

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and then gave us a great buying
opportunity, as you say, post Liberation

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Day.

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where we...

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to know just how attractive it was back
then in April last year.

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But yeah, all the way down,

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we disconnected from global bond yields
and actually all of that term premier

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getting

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reduced.

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And I guess also with the benefit of
hindsight,

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you would say that because of those two
strong years for bonds,

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we were likely exposed for any correction,
which did play out with this risk event.

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After that, of course, other things
intervened as well.

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The rand in association with the bonds
went stronger.

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South Africa was taken off the grey list.

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There was an upgrade from one of the major
world rating agencies.

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Things started to get better in the macro
economy.

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There was no more load shedding.

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And just generally, things were set fair
in South Africa compared to previous

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years.

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And here we are now with those same
fundamentals, I think, but a little bit of

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a wobble because...

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of the war.

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Now, you have said here, though history
may not repeat, it rhymes, they say.

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And what we can observe over the previous
three significant bond market drawdowns,

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compared to the one we've just experienced
or are experiencing, the subsequent months

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did recover.

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Now, Truman, I think it was that said,
there's nothing new in this world, only

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the history we don't know.

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So we know the history, is it going to
repeat itself?

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That's the million dollar question.

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I think you've got to zoom out a little
bit, Lindsay, and think, well, you pointed

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out, so fundamentally,

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not much has changed other than this
energy shock that's going to introduce

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higher inflation

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for an undetermined period of time.

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And the risk then to that is higher
interest rates.

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But were things to settle down, you'll
have some scarring,

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presumably from the higher oil prices
working their way through inflation.

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But then Will we recover?

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And that's the big question.

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And going on past history,

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it certainly seems like bond markets do
recover after significant drawdowns.

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So we always tell investors, you know, the
past isn't necessarily predicting the

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future.

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But I think it is fair to say if your
fundamentals still line up,

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that once the risk event that's affected
your asset prices moves out, and when

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other fundamentals get back in the
direction they were, then we should see a

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recovery.

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And that's something that is worth
investors considering,

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is what the outlook looks like for those
fundamental factors like inflation,

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like the path of interest rates.

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And we do suspect that for bond investors
over time, it should normalize.

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And hopefully it's prophetic that we're
speaking right now because of what Mr.

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Trump has said in the last couple of
hours.

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But we can always say he said something in
the last couple of hours, but this time

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quite meaningful for the oil market.

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Because the oil market, whether it's West
Texas you like or Brent, they're both down

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about 15, 16,

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17 percent in one case.

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And that is terribly good news.

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It's still not great news compared to
where it was earlier on in the year, last

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year rather, where it was around $60 a
barrel at one stage.

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and now still in the low

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90s, it still builds the case for bonds in
South Africa again, doesn't it?

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Yeah, well, I mean, the correction
certainly is welcome on that oil price.

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You're quite right, though, from 60 to 90,
that's a significant enough increase to

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put inflation into the system.

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But we know our central bank does look
through these external shocks and wants to

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see it showing up in

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second round effects.

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And so that is a glimmer of hope for us,
though the price remains elevated,

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that hopefully it washes out of the system
sooner.

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We have been trading headline to headline,
but you're quite right.

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These latest headlines do show a little
more promise that we could be coming to

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the end of this.

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Are you saying then that we should be
looking at fixed income and bonds?

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We should be buying bonds at these levels
because of the potential change in

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fundamentals when it comes to warfare?

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And having a look at fixed income funds,
for example, if you're allowed to say

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that.

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So, I mean,

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what we would say certainly is if you had
money to deploy and you are thinking of a

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term

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investment that is suitable for something
like bonds,

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then you've been presented with better
entry levels over the last month from

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where we

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were.

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Still not quite as, you know, still not
quite where we've been.

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been.

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We've recovered already quite strong
today, but we're still better than where

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we were a little while ago.

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And if your belief is that the
fundamentals will normalize here, then

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yes,

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it would be a good thing to consider a
slow move into fixed income at these

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levels.

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James, thanks so much for your analysis.

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James Turp is a portfolio manager at 91 in
Cape Town.

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The views and opinions expressed in these
podcasts are those of Lindsay Williams.

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and various contributors and do not
reflect the policy, position, or opinion

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of any other agency, organization,

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employer, or company associated with
StrictlyBusinessPodcast.com.

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Assumptions made on the analyses are not
reflective of the position of any other

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entity other than the speaker or the
author.

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And since we are critically thinking human
beings, these views are always subject to

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change, revision,

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and rethinking at any time.

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Please do not hold us to them.

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in perpetuity.
