With rates on hold at 5.5%, SA credit provides best fixed interest opportunity

There was little surprise in the decision by the South Africa Reserve Bank (SARB) today to keep rates on hold at 5.5%, a level at which we expect they will stay at for a long time. Growth remains soggy and below trend, and while inflation has been out of the target band for a few months now it is not running away on the upside.

Of course, with Europe not out of the woods yet the risk of a rand blow-out remains, however politicians finally appear to be moving in the right direction and some kind of muddle-through solution for the Eurozone should be on the cards.

Where to for fixed interest investors in this environment?

Interest rates globally are going to stay lower for a lot longer than was originally anticipated, so fixed interest investors also need to adjust their expectations for returns that are going to be a lot lower. Capital gains in 2012 are unlikely to be meaningful and cash, expected to return around 5.5% for the year and possibly beyond, is not even going to beat inflation. In this environment a return of 7.5% to 8% from fixed interest would be a good outcome, but it is imperative to structure the portfolio in such a manner to extract the maximum yield for investors.

Given their sound balance sheets, corporate South Africa remains robust. We believe South African corporate debt is one of the most attractive investments across the fixed interest spectrum and provides the necessary yield enhancement to ensure decent returns.

Furthermore, for those funds that are allowed foreign exposure, offshore local credit offers an even better opportunity to access SA Inc. The European crisis has resulted in all credit spreads in that market widening, regardless of the soundness of balance sheets. This paper is limited given that not all SA companies have issued debt abroad, but we have taken advantage of this opportunity where possible.

For those funds invested solely in domestic assets, we have sought out private placements to ensure that we have decent exposures and therefore respectable yields in the portfolio. Diversification remains a key consideration, so we are mindful of ensuring that our investments are spread not only across companies but also across sectors.