By Albert Botha, head of fixed income portfolio management at Ashburton Investments.
The combination of the lower inflation rate at 4.1% yoy and the negative market reaction to a somewhat disappointing budget has driven the real yield on the SA 10 year bond to over 5%. This is compares very favourably to peers such as Brazil and Turkey who sit at 3.69% and 3.65% respectively.
It should however be noted that it increasingly seems like there is a challenging relationship between labour and government with the Minister highlighting troubling statistics in his speech.
There are currently over 29’000 public servants earning more than R1m per year, the annual increase in wages is expected to be 6.3% (more than 2% above current inflation) and wages in the public sector increased by 10.4% in the first half of 2019 compared to 2.1% in the private sector.
Yields in SA are high and attractive, but investors should not expect significant cant returns from capital gains and be ready for continued uncertainty and volatility.