FERNANDO DURRELL: Navigating global volatility with an SA edge

SA investors are benefiting from one of the most attractive fixed income opportunities globally. With yields of inflation plus 5%-8% on offer from bonds and cash — and a disciplined, hawkish central bank underpinning the environment — local portfolios can meet real return targets without chasing unnecessary risk.

This clarity is especially valuable now, as the past six months have delivered a carousel of complex risks: escalating Middle Eastern tensions, global tariff retaliation, erratic inflation paths and developed market valuations that are uncomfortably stretched.

The key concern is whether there is market complacency, particularly given low-probability, high-impact events such as the closure of the Strait of Hormuz. History reminds us that the improbable can quickly become reality, as Brexit once did, which is why in uncertain times such as these absolute return strategies grounded in discipline and flexibility are more relevant than before.

SA investors are in a uniquely fortunate position. While much of the developed world is forced into risk assets to chase real returns, we are sitting on a remarkably attractive fixed income opportunity. These are attractive for a reason, but we maintain that these risks are priced.

Thanks to a rare combination of structural and policy factors, we are able to meet inflation-plus targets in assets such as (enhanced) cash, which is offering up to inflation plus 5%, and bonds, with yields at inflation plus 5%-8%.

Their risk levels are a fraction of those in local equities or foreign assets. This is not the global norm. In the US, for instance, clients targeting say inflation plus 5% must often rely on equities as bonds are only yielding inflation plus 2% on average. But in SA bonds and cash are giving us what we need — and we don’t have to chase unnecessary risk.

A key factor is the credibility and discipline of SA’s central bank. We’ve got a proper hawkish central bank governor. And that matters. Tremendously. The SA Reserve Bank has taken a firm stance on inflation and interest rate management.

That approach, though painful in the short term, has created an environment in which investors are being handsomely compensated for taking relatively lower risk. The local money market and fixed income spaces are functioning with real clarity, giving us more tools than many of our global peers have.

Looking ahead, our positioning remains rooted in:

• Tactical allocation to bonds and cash while solid real yields are on offer.
• Minimising capital loss over short time frames.
• Avoiding premature rotations into overvalued or higher-volatility assets.

We are not blind to upside potential. Tariff reversals, US earnings recoveries and co-ordinated rate cuts could all reignite market optimism. But we must also recognise the risk of further escalation — whether in Taiwan, the Middle East or within protectionist US policy frameworks, let alone US fiscal policy risks.

Critically, even if tariffs are removed business confidence may not bounce back. Once eroded, trust is hard to rebuild. Many executives are simply choosing to sit on their hands rather than rerisk growth plans in an uncertain regulatory regime. In periods such as this in which sentiment is volatile, process is your protection. It shields you from your own biases.

Our absolute return philosophy hinges on this discipline. We don’t react to every headline, we filter, assess and respond through a process that integrates quantitative signals and informed experience. When the opportunity shifts, we shift. When risk narrows, we lean in. But we never compromise on the core mandate: we always reach for CPI plus targets first, while seeking to minimise capital loss.

Markets may look calm, but calm is not certainty. Our role is not just to deliver returns. It’s to deliver resilience and to protect client outcomes across cycles. That means leveraging the rare SA advantage: strong fixed income expected returns backed by a credible monetary regime, and the flexibility of a tactical, process-driven multi-asset approach.

• Durrell is head of absolute return at Sanlam Investments.