A decade ago, few of us would have contemplated the idea of negative monetary policy rates, let alone negative market-determined bond yields. Yet, today, four of the world’s central banks have negative policy rates, while there is US$16 trillion worth of bonds trading with a yield below zero.
The restart of economic activity is real and broadening. This supports our pro-risk stance and our underweight in government bonds as we believe their low yields don’t reflect the restart’s momentum. We see the U.S. passing the baton to Europe and other DMs in leading the restart, whereas the delta variant may challenge some EMs lagging in vaccinations.
The powerful policy revolution implies a lower future path of interest rates than markets are pricing in, even amid rising inflation over the medium term, as captured in our new nominal investment theme. Lower rates – even compared to our previous expectations – lift our expected returns across asset classes over the strategic horizon, and reinforce our preference for equities over bonds.
In line with the announcement made by the Minister of Finance in the special appropriation bill speech on 23 July 2019, additional financial support to Eskom and the preliminary indication of tax revenue shortfall relative to 2019 Budget has resulted in a revised funding strategy and an increase in government borrowing requirement for 2019/20. This...
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