An increasing number of South African investors are seeking safety in the low-risk asset class that is fixed income due to continued sluggish economic growth.
Speaking at the 2018 Absa Fixed Income Conference in Johannesburg on Friday, Head of Fixed Income at Absa Asset Management James Turp said that investors are moving away from risky asset classes. “Until we see signs of growth in the economy, cash, and fixed income is a good place to be if one considers past performance. Property, equities, and other asset classes will continue to underperform until we see sustainable economic growth coming through global developments that favour Emerging Markets, or domestic investment,” said Turp.
Changes to economic growth will likely come from supportive changes to global trade, inflation and yield normalisation, domestic politics and economic structural reforms. “We are witnessing a turn-around era, with government focused on filtering out corruption, and stimulating economic growth, which can lead to employment,” he said.
Turp has yet to see compelling evidence to support a focus away from inflation beating fixed income portfolios. He explained that in multi-asset class balanced portfolios, fixed-income is playing a massive role in preserving value, offering less capital volatility. “In current, volatile markets fixed income is the stable cornerstone of multi-asset portfolios.”
“Since the global financial crisis, commodity demand has dissipated. Having been a primarily commodity focused economy we needed to diversify into manufacturing and agriculture, when times were good,” said Turp. “The big question now is, where is the growth going to come from?”
While the basket of emerging market currencies has weakened against the US dollar, the rand hasn’t performed as poorly as some of the others. “A lot of weakness can be attributed to contagion we get by proxy from other emerging markets.” Emerging market performance has been linked to the strength of the dollar and the reduction in global dollar liquidity, a reversal, could help emerging markets come back into play.
Focusing on Absa Asset Management’s Fixed Income portfolios, Turp stated that it is imperative that “we deliver returns in excess of inflation, as determined by our mandates, at the lowest appropriate risk”.
Absa’s fixed income product range includes the Absa Money Market, Core Income, Income Enhancer, Flexible Income, Tactical Income, Inflation-linked Income and Absa Bond Fund.