South African equities are a better bet for investors than its bonds despite yields that are among the highest in emerging markets, according to one of the country’s largest asset managers.
Crippling power shortages have hobbled economic growth and hit earnings at South African companies, dragging down share prices. Investors are also turning cautious in the lead-up to national elections next year that could see the governing party lose its outright majority for the first time. On top of that, there are concerns about a widening budget deficit.
To be sure, there are factors in favour of South African bonds: they offer a high yield in real terms relative to other emerging markets, given that rates on the 10-year have climbed above 12% and inflation is running at 5.6%. And it’s a plus point for South Africa that most of its debt is in rand, with long maturities. But the concern is slow economic growth and a deficit that increases the debt burden each year, Acker said.