BROKERS’ NOTES: Buy SA bonds, sell US stocks

Izak Odendaal, investment strategist at Old Mutual Wealth:

BUY: South African government bonds

South African nominal government debt remains a good buy with 10-year bonds yielding real returns in excess of 3pp.  (Remember, the yield on a bond is inversely related to its price.) A couple of factors support the outlook for longer-dated government debt. First, the government’s fiscal position is improving as it seems the Treasury is keeping a tight lid on expenditure. Second, the long-term inflation outlook for South Africa is improving. With interest rate increases totalling 3.75% since the end of 2021, the Reserve Bank has kept inflation under control. Finally, global bonds are moving closer to their peak valuations. Once the yields on global bonds have peaked and they start to decline, South African debt will become more attractive.

SELL: S&P 500

The S&P 500 has had a good run lately. But now it seems expensive, trading at a p:e of 18 compared with its historic average of 15. In addition, US economic growth is slowing, and the US might enter recession later this year. The S&P 500 looks expensive compared with other asset classes, notably US short-dated Treasury bills (the equivalent of South Africa’s government bonds). The earnings yield of the S&P 500 is 5% whereas the yield on T-bills with a maturity of six months also sits at about  5%. It is the first time in 20 years that these two measures are almost the same and US large caps now face serious competition from cash and bonds.