From today local investors can buy global bonds via the JSE with no exchange control hassles. But should they?
- The JSE got its first ever exchange traded fund for global bonds on Tuesday.
- The Ashburton Investments fund tracks the Citi World Government Bond Index.
- That gives South African investors the chance to buy into 22 foreign bond markets without any exchange control hassles.
- But foreign bonds may not be a great buy in the long term.
On Tuesday FirstRand's Ashburton Investments listed its new Global Bonds exchange traded fund (EFT) on the JSE, giving South African investors the first ever chance to buy the government bonds of of almost two dozen countries without first having to take money out of the country.
The new EFT tracks the Citi World Government Bond Index (WGBI).
That currently means that money invested in the Global Bonds EFT will disproportionately go into US government bonds (34%) followed by Japan (19.7%) and France (8.4%).
The fund also tracks the government bonds of emerging markets like Malaysia, Mexico, Poland – and South Africa.
However, South African government bonds make up only about 0.5% of the value of total holdings.
Because the WGBI only tracks investment-grade bonds, those South African bonds could fall out of the index (and so the JSE EFT) should Moody's downgrade SA to sub-investment grade.
Fixed-rate ETFs are gaining popularity among investors worldwide. The world's largest asset manager, BlackRock, reported in October that assets under management in bond-focused ETFs have grown 25% annually for the past five years and are likely to reach $1.5 trillion by 2022.
There seems to be an appetite for emerging market bonds in particular with the J.P. Morgan EMBI Global Diversified index which tracks sovereign bonds from emerging markets rising 10% last year.
The new ETF may be tempting for short-term investors who would like to capitalise on the current rand strength, says Cassie Treurnicht, portfolio manager at Gryphon Asset Management.
But while bonds are seen as safe investments, longer-term bond investors will get hurt when central bankers around the globe start to hike interest rates in reaction to inflation, Treurnicht warns.
The consensus is that the US will hike rates three times this year.
“Europe will be next as some pressure already exist to get rid of quantitative easing and normalise rates. Global growth is currently strong, and we’ve seen this movie before... inflation shocks come through when it is too late.”
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