It is important to recognize that South Africa is currently lagging behind its peer group economically, and once the risk-on rally has faded and markets look past global drivers, looming fiscal cliff and debt issues are likely to be reflected in asset classes. The majority of earnings produced by JSE-listed companies are generated outside of South Africa. Headwinds in the global environment could filter through to the local exchange as well, while a deteriorating fiscal situation and structural economic issues could hamper the prospects of those companies which operate only in South Africa. Investors thus need to look for exposure to those companies that offer some immunity against the local environment. Investors should also bear in mind that where the JSE in the past has acted as a useful proxy for emerging markets, as more and more emerging markets become Asia-Pacific focused, they should consider adding other emerging market exposure to achieve true diversification.
While the local bond market is one of the few in the world that may generate positive returns for investors in 2021, this should be treated with caution and investors should rather consider taking profits or even go underweight. Bond yields were trading around 9% in March 2020 and, following the Moody’s downgrade to sub-investment grade, these yields exploded to 13% to compensate investors for the higher risk of government default. However, yields have returned to 9%, seemingly indifferent to the fact that our fiscal situation has significantly deteriorated due to the pandemic, and that our budget deficit will be twice the size anticipated at the start of 2020. In light of this, it is highly unlikely that the local bond market will continue to trade at current levels indefinitely.