Absolute Zar Local Portfolio
Our local asset allocation has been updated to reflect our current belief that SA sovereign debt offers the single best opportunity from a risk / reward perspective given the unprecedented local and international backdrop.
We augment the portfolio with bank issued Preference shares (they have sold off materially given the immediate rush for liquidity and cash.) We continue to invest a portion (albeit small) in large listed corporate and Reits and will phase buying over the next 8 months.
Local Macro Snapshot
Like the rest of the world, South Africa will fall into a deep recession in 2020. Unlike the Global Financial Crisis, however, South Africa enters this downturn a lot weaker.
The Moody’s downgrade is now behind us; SA is out the Investment Grade Bond index. We have approached the Bricks Bank, World Bank and IMF for funding. Worryingly the government’s approach to the pandemic from an economic perspective has been nothing short of disastrous – the most worrying aspect been the likelihood of protracted lock-downs.
The economic impact and costs will be severe and unlike places like the US, economic recovery will not be swift.
South African bonds staged a significant comeback with yields for 10-year money, falling from 11.6% to 9.3% at the time of writing. SA credit still has some of the highest credit spreads given our current lowered sub investment grade rating in the world. It is highly unlikely that the government will default on SA debt (they will keep printing money) and we cannot see enormous inflation given a backdrop of extreme excess capacity both locally and abroad (take the low oil price and massive jobless claims by way of example).
Most SA companies have cancelled dividends, pulled guidance, cancelled capex programs, focused on cost reduction and in a growing number of cases look to raise capital to shore up stressed balance sheets.
And given our underlying philosophy of wealth preservation and skewing risk reward in our favor, our single biggest conviction idea in SA remains SA sovereign debt.
As such we go into Q3 2020 with SA government debt, cash and preference shares representing 80% of our portfolio.
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Hurdle Rate: Stefi +3
What distinguishes Skycastle is its ability to be nimble and create portfolios best suited for the current economic conditions.
*Portfolio positioning and current global snapshot is a point in time, for updated info please contact us