Bonds, banks are flavour of the month

Global tariffs, slower growth, volatile markets and skittish partners in South Africa’s grand coalition mean there is a cacophony of noise out there waiting to trip up South African investors. But if staying calm is the best approach, it’s easier said than done.

Wealth managers canvassed by Currency tip bonds, certain emerging-market stocks, and specific South African shares as solid bets for this moment. Alternative assets, such as hedge funds and private equity, aren’t bad bets either.

But the US market – a country whose president seems hellbent on kickstarting a recession and fanning inflation – is unpopular right now, justifiably. American stocks, even after last month’s plunge, remain too expensive.

Local investors had a horror month: the rand fell to a record low against the euro and the pound, and came within a whisker of its weakest level yet against the dollar, while the JSE’s all share index slid to its lowest in eight months.

The catalyst for all this, as everyone knows by now, was US President Donald Trump’s announcement of his “Liberation Day” tariffs against the rest of the world on April 7. It sparked a widespread panic on the markets, threatening to upend the entire global financial system.

Only, by midway through the month – when Trump announced a 90-day pause on the tariffs – the markets bounced right back: the rand retraced almost all its losses, with the JSE’s all share index not only recovering but going on to hit a record.

The reason is that investors clearly expect that despite his initial sabre-rattling, Trump is likely to reach relatively benign trading deals with almost all US trading partners. Already, the first such deal has been clinched with the UK.

By Thursday, this prospect had triggered a new “risk-on mode” on Wall Street, as Bloomberg reported. This renewed appetite for risk arose after a US negotiating team, led by treasury secretary Scott Bessent, met with a Chinese delegation led by vice-premier He Lifeng to de-escalate tensions between the two countries.

Slippery slope

Things have changed rapidly – but just as you should not have overhauled your investment portfolio at the beginning of the month when the clouds were gathering, so too should you not be tempted to switch everything around now.

“It is notoriously difficult to time the market correctly on a consistent basis, especially over the short term, and when volatility is elevated,” Jan-Daan van Wyk, associate director at Stonehage Fleming Investment Management, tells Currency.

Be mindful that the investments are for the next 10 or 20 years, so cannot be viewed solely on what is happening today.

As a multi-manager, which pools clients’ funds and then allocates them to other managers, Stonehage Fleming favours cash right now for its domestic multi-asset fund, given the uncertainty. It was marginally “overweight” equities coming into 2025 but has since pared that back to being more in line with benchmarks, or a “more neutral level”.

It doesn’t switch asset allocations frequently either.

“Our investment approach leads us to adjusting our positioning at the margin; tweaking and tilting as opposed to taking outsized bets on short-term moves in the market,” says Van Wyk. “Diversification is integral.”

Still, Stonehage Fleming does see some specific opportunities right now.

These include local bonds, which pay annual yields of about 9%-11%. With inflation now below 3%, these bonds will be paying out a real after-inflation return of 6%-8%.

South African stocks are also attractive, Van Wyk says, pointing out that the FTSE/JSE Africa all share index is trading at a value below its historical average, which suggests there is upside here.

So, which sectors offer the most promise? Here, Van Wyk cites South Africa’s banks as a standout option, given their solid management teams and ability to prevail in the toughest of times.

But what of the politics? One of the biggest threats to local stocks in recent weeks has been the possibility that the government of national unity may shatter entirely.

Van Wyk doesn’t see this as likely. Instead, he is “cautiously optimistic” that the DA and the ANC will stick it out, at least in the short term, given the incentives in place for both parties to remain in the coalition.

“Coalition politics is not new. This is South Africa’s first real stint at it in the democratic era and there was bound to be growing pain,” he says. “Countries like Germany, Spain, the Netherlands, and even the UK have gone through it. What is important is that the parties stay at the table and focus on working with (as opposed to against) each other.”

But if South Africa is to seriously win back foreign investors, the government will need to begin delivering on its growth promises made when the coalition deal was struck. In particular, the government needs to begin building new infrastructure.

Disciplined, but nimble

Still, even if staying cool is the superior option, it’s clear the investment rules have changed.

After more than a decade of ultra-low interest rates and strong equity returns, investors are now facing the prospect of lower returns amid Trump’s push for a new world order, rising protectionism and deglobalisation.

For Ninety One multi-asset analyst Dan Morgan, this strengthens the case for active investing, rather than simply relying on passive exchange traded funds.

South Africa’s largest publicly traded fund manager expects that a traditional 60/40 global equity and bond portfolio in dollars will return just 4.4% annually over the next decade. That’s better than last year’s forecast, but still well below the historical norm, Ninety One said in a Capital Market Assumptions report.

Much of that muted outlook is due to headwinds for valuations in developed markets, such as the US. Instead, Ninety One sees more potential in emerging markets and Japan, where valuations are more reasonable and structural reforms will help.

The asset manager sees returns north of 10% for South African government bonds in rand terms, if inflation stays under control and the government sticks to its pledge to cut its debt-to-GDP ratio. Local shares will only deliver modest returns, it said.

Old Mutual Wealth suggests staying disciplined, but nimble.

“We see value in South African bonds, selective equities, and alternative strategies that can generate returns uncorrelated to market direction,” says Old Mutual Wealth investment strategist Izak Odendaal. He also says it is important not to overreact to currency swings: “The rand’s volatility is normal and timing it is extremely difficult.”

With so much uncertainty, it is important to pause and not succumb to knee-jerk reactivity, explains Stonehage Fleming’s Van Wyk. And also ensure that risk is adequately “compensated for”.

_{Top image: Michael M Santiago/Getty Images.}