Valuations in South Africa still favor local bonds, despite political uncertainty and fears of downgrade, according to Old Mutual Multi-Managers (OMMM), a fully integrated, advice-led wealth management business.

Dave Mohr, Chief Investment Strategist, and Izak Odendaal, Investment Strategist, said: “We are overweight fixed income in our Strategies.”

“The latest bump in the rand and the oil price doesn’t meaningfully alter the expectation that inflation will decline next year and that the repo rate is close to peaking (it probably has peaked).The attractive current yields therefore offer the prospect of reasonable real returns,” they said.

From a diversification point of view, OMMM’s strategies remain close to the 25% maximum offshore allowance, which should benefit from any sustained further depreciation in the rand.

“But remember that local equities also have a strong rand-hedge component, benefiting in general from a weaker currency (much like how the UK equity market has been flying as the pound has fallen),” Mohr and Odendaal said.

“Therefore it might not be necessary to add additional rand-hedge exposure to your portfolio, even if you are worried about the impact of politics on the rand (although in reality commodity prices and global risk appetite play a far greater role),” they said.

The rand fell sharply when news broke that Finance Minister Pravin Gordhan has been summoned to appear in court in November.

He faces a fraud charge for what the CEO Initiative has termed “essentially an administrative and human resource matter” for his role in granting former SARS deputy commissioner early retirement. 

Gordhan is due to present the Medium Term Budget Policy Statement (MTBPS) or the ‘mini-budget’ in two weeks’ time, but it is unclear whether he will still be in his post.

“The MTBPS will largely be finalised by now, and therefore the content is unlikely to change even if Gordhan was not delivering it. However, this creates uncertainty, and financial markets don’t like uncertainty,” Mohr and Odendaal said.

South Africa avoided ratings downgrades to junk status in May and June, but scheduled reviews in November and December loom.

S&P Global, which has South Africa’s foreign currency bonds on the lowest investment grade rating (BBB-) with a negative outlook, expressed concern this week that politics could interfere with policy.

“But the government’s credit rating is far from the main factor in determining long-term returns for investors. Starting valuations, commodity prices, US interest rates and global risk appetite are all independent of the credit rating and will impact the extent to which your capital grows or not,” Mohr and Odendaal said.