Valuations are now “extremely cheap” and overprice South Africa’s numerous challenges, strategists including Christian Wietoska wrote in a client note moving their recommendation on the debt to “strong overweight” from “overweight.”
The view puts Deutsche Bank at odds with many foreign investors, who have been dumping the bonds amid South Africa’s deepening power crisis, deteriorating fiscal outlook, weakening rand and a row with the US over Pretoria’s relations with Russia. Year-to-date outflows from the government bond market topped $1.4 billion last week, exceeding the $1.1 billion for the whole of 2022, according to JSE data compiled by Bloomberg.
“Although local bonds have come under heavy pressure over the past couple of weeks, we view this as a very attractive opportunity to increase exposure on local assets,” the strategists wrote. “After the selloff, local bonds are now the cheapest we have seen over the past six years in our fundamental fair value model.”
Deutsche Bank forecasts a rally in the benchmark 10-year yield to around 10% by year-end, from around 11.75%. Yields across the curve could drop by as much as 200 basis points, they wrote.
Tuesday’s government bond auction provides an opportunity to snap up some of the debt at “very attractive” levels, they said. The National Treasury is selling R3.9 billion of debt maturing in 2035, 2037 and 2040.