BUSINESS NEWS - South African investors are feeling saturated with bad news particularly with regard to their equity investments.
What seems to get less attention is fixed income investments where the news is more positive.
So what is fixed income?
Fixed income investments, also called bonds, can be defined as debt investments or ‘IOUs’. Say a company (or the government) needs to raise money; instead of going to a bank for a loan they can offer to issue a bond to investors. Essentially they are borrowing money from investors, in return for which they promise to pay a specified amount of interest (known as the coupon or yield) over a specified period (the lifetime of the bond).
Why is fixed income a worthwhile investment?
The purpose of investing is to get your money to grow by earning returns above inflation. Fixed income generally offers an above inflation and stable return profile. Bond yields are affected by short-term market movements like global sentiment and currency movements, but over the medium to long term have more stable returns due to the fixed nature of the coupons. Therefore fixed income is ideally suited to risk adverse investors who seek more certainty on investments. The biggest risk of fixed income is the chance of the issuer not being able to repay its debt or that there is a dramatic rise in interest rates.
What are the current opportunities within fixed income?
Currently the repo rate (the rate at which the Reserve Bank lends money to banks) is at 7% (prime 10.5%) and consumer inflation above the upper target of 6%. Increased interest rates negatively impact costs to households. Conversely, however, they can mean that yields on fixed income investments become more favourable as the bad news is reflected in the price of the bond. Markets tend to overshoot on the pricing of bad news and this creates opportunity if reality turns out to be less bad than what is in the price of the bond.
While the average investor does not invest in bonds directly, due to the institutional nature of the bond market, they can do so through a variety of unit trusts, from low risk income funds through to multi asset balanced funds.
Article by Ian Scott, Head of Fixed Income, PSG Asset Management
'We bring you the latest Garden Route, Klein-Karoo, Hessequa news'
