Buy Long-Term S.Africa Bonds as Economy Wilts, Futuregrowth Says

  • Rand undervalued while economy impeded, Old Mutual Unit Says
  • Comfortable with `very gradual tightening' by central bank

South African long-bond yields offer better value than cash and medium-dated bonds in an economy battered by a drop in commodity prices and a weak currency, according to Futuregrowth Asset Management Pty Ltd., a unit of Old Mutual Plc.

“This is even more so now that the South African Reserve Bank has tightened monetary policy by 1 percent since January, 2014, especially considering the weak state of the economy and more muted inflation backdrop,” Wikus Furstenberg, portfolio manager and head of the interest-rate team at Cape Town-based Futuregrowth, said in a note to investors on Wednesday.

The rand has dropped 14 percent against the dollar this year as the economy falters under the weight of weaker commodity prices, a power shortage and job cuts at mining companies. Even so, the South African Reserve Bank is expected to raise rates further as inflation exceeds its target range in the first and fourth quarters of next year.

Futuregrowth, with 150 billion rand ($11.2 billion) under management, is “comfortable with the prospects of a very gradual tightening process” in the benchmark rate, Furstenberg said. A more aggressive approach would subdue economic growth and see the lender increase its holding of long-dated bonds, he said. 

The asset manager’s broad interest-rate strategy for a core bond fund benchmarked against the JSE All-Bond Index is overweight in bonds with terms longer than 15 years, underweight in debt with terms less than 12 years and neutral to overweight in cash, the Cape Town-based manager said. Tighter monetary policy expected this year in the U.S. may cap global bond yields and benefit countries offering higher yielding assets, such as South Africa, Futuregrowth said.

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