How are South African Bonds doing?

AUGUST 2019 – GLOBAL AND LOCAL BOND PERFORMANCE

When looking at global bond yields, South African 10-year bonds are yielding more than 8%. Monetary stimulus has largely failed to stimulate economic growth in Europe and Japan. Japanese government bonds have negative yields. On 21 August, the German government issued two billion Euros worth of negative-yielding 31 year-zero-coupon Bunds. On a global comparison, the Real Yield rates on bonds for South Africa are standing out quite impressively alongside Indonesia and Brazil.

Rate Comparison

With South African bonds looking good in global comparison, should we be flocking toward them? With the Reserve Bank aiming to keep inflation below the 5% mark, bond investment could stand to earn about 4% with very little risk. Local Bond fund benchmarks returns over the last year have been about 11,5%. Money market benchmarks are sitting at around about 7% returns year to date.

in light of this, SHOULD SOUTH AFRICAN INVESTORS FLOCK TO BONDS?

The answer lies largely in the individual investor’s investment goals / investment objectives and the risk appetite. Markets are unpredictable, trying to time the markets purely based on performance rallies is a dangerous game. When an individual sets investment goals (reasons why they are investing), these investment goals are matched to tailored financial plans. From these plans, investment solutions / portfolios are designed in order to meet these objectives.

Once a goal is set, strategy needs to be employed to determine how to obtain it. The key to success lies in staying the course and sticking to the strategy. Any person who has tried to implement a new healthy lifestyle of eating right and exercising would know this well. Let’s compare investing to this scenario for a moment. A lifestyle goal or aesthetic goal is set by an individual. From there the strategy through work-out plans, lifestyle habits and diets are set by that person, or a personal trainer and dietitian. Much of the success to achieving that lifestyle goal or aesthetic goal, lies in the discipline of sticking to the strategies employed to get there. Life happens, birthday cakes come around and gym sessions are missed because of busyness, but that does not mean the person has to discard the plan all together.

Such is investing. When an investment goal is set, a strategy is laid out on what assets to hold in order to achieve that goal. These asset allocations are strategically picked by asset managers and financial advisers, who understand the performance of those assets in varying market conditions. “Markets happen”, events occur and fluctuations in equities may not always outperform in the short term. However, the discipline of sticking to the strategy and trusting the expertise of the professionals will pay off. Much like good personal trainers and dietitians, they will know when to change the plan to increase the progress towards your goal. They will know when to cut the carbs or increase them, when to increase cardio or do less of it. In the same way, the asset manager and financial adviser will tactically tilt your portfolio correctly, to help you stay on track towards your financial goals throughout market conditions.

Time, Risk and Growth are closely linked and are embedded in your portfolio’s strategy. Whether the portfolio is a 1,2,5,10 or 30-year investment plan, will determine what type of risk assets should be included. Reason for investing is key in determining time and risk. Time-tested evidence shows that equities outperform bonds by far when looking over the long term. However, one needs to have the ability to leave the investment to grow and ride the tides of the market throughout the years. When you exit your investment prematurely, it interferes with the investment strategy which is very reliant on time in order to obtain the growth you want on your investment.

 

IS PATIENCE REALLY REWARDED?

We have all heard the phrase “Patience is rewarded”. This is true for many areas of life. However, does it apply to equity performance as well? Let’s look at this in practice on the S&P500 during the 2008 / 2009 financial crisis.

The 2008 / 2009 financial crisis was a perfect example of fear in action and inability to wait patiently. Markets were evidently crashing, for that period markets had dropped over 50% in value. The first red dot on the graph shows where people started to sell out of equities (second quarter of 2008). The second red dot shows where they slowly started to come back into equities (trickling-in in 2012). The ending point of the financial crisis, February 2009, the S&P closed at 889,46. As markets started recovering, we still saw massive hesitation from investors to increase exposure to equity markets. By 2012, the January closing was 1486,96. Despite the recovering state of the market, people had still not regained confidence to enter the equity markets again. Over the period of 2008 / 2009 over $150 billion worth of equities were sold by investors during the market drop. Looking at the overall sharp incline since February 2009 closing price at 889,46, the closing price to date (August 2019) is at 2929.39.

We saw the same on the NASDAQ, it closed 1667,19 on February 2009 and from that point onward exponentially inclined to a closing price of 7970,85 August 2019 to date.

 

WHAT CAN WE LEARN FROM THIS?

It was only after 2012, that investors started to normalise buy-back into the equity markets after the crash of 2008 / 2009. At this point they would have been buying into equities at the higher prices after market recovery. They would have already lost out on the largest gains in the price growth, from the point of crash to the point of recovery in 2012. By acting this way, investors realised massive losses by selling at a cheap / crashing market price and later buying at a more expensive / recovering market price.

Historically, markets are known to work in cycles. If your investment horizon has a long-term based view, then equities are known to outperform bonds. The longer-term approach ensures the investment remains in the market through all the market volatility. Trying to time the market through reacting to its movements is a dangerous task for investors to attempt. Asset management skills are set to proactively understand macro-economic environments and tactically tilt portfolios accordingly. They have the precision to take hold of the opportunities that present themselves, even during the downturn of markets.

It is important to always refer back to one’s personal investment goals and objectives, before changing the strategy of buying and selling out of asset classes. All decisions we make should not be from a place of fear or greed, but rather in patient-alignment towards our end goal.

– Kheara Kroggel,  edited by Danielle Hanekom