In a recent opinion piece, Londa Nxumalo, co-portfolio manager of the Allan Gray Bond Fund, argues that the threat of a downgrade by Moody’s to sub-investment grade is significant and could negatively affect bond prices. However, this may be priced in already and there is life after “junk” status.

“South Africa’s deep and liquid financial markets and a captive savings pool provide a floor for bond prices, and the foreign investor base would not disappear entirely if global conditions remained conducive for offshore investors to find emerging markets attractive,” says Nxumalo, adding that if inflation remains well behaved (the SARB’s midpoint target is 4.5%), higher bond yields would provide attractive real returns for bond investors.

The timing and the uncertainty of a pending downgrade mean that while bonds offer an opportunity to diversify a portfolio and generate real returns, investors should be cautious at this time.

Click here to read the opinion piece, which includes graphs as illustration.