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The Asset Class: James Turp · Strictly Business

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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.