By Arney Tjaronda
High Economic Intelligence analyst.
Looking at the releases from the Bank of Namibia (BoN) and the Namibian Stock Exchange (NSX) in June 2022, the majority of sovereign government bonds were oversubscribed by the public while equities faced market conditions horribly bearish.
There is a phenomenon to reveal to understand the narrative of the impact of current geopolitical tensions, inflation, rising interest rates and decisions made by rating agencies on government bonds.
Usually, bonds are a good investment vehicle in a bear market because of their hedging properties. Define a bear market, it usually means that prices are going down and there is a lot of pessimistic behavior from market participants. In the face of pessimistic market behavior, this translates into the sale of stocks, ETFs and any other vehicle that could be negatively impacted by the bear market.
Subsequently, market participants look for “hedgeable” investment instruments like commodities, bonds, and cryptocurrencies to prevent them from losing money in the stock market when prices fall. According to FRED data for 20 years, bonds and equities are perfectly (positively) correlated.
This implies that when the prices of all listed stocks fall, bond subscriptions increase and this is due to the risk involved. Bonds are less risky than stocks because they offer a fixed rate of return, while stocks do not have a fixed rate of return because returns are not limited. Moreover, they are less volatile depending on the economic environment.
Following the geopolitical war between Russia and Ukraine; rising interest and inflation rates, escalating oil prices and fears of a possible global recession have changed investor perceptions, making bonds more desirable than to help hedge against collapse stock markets.
Unfortunately, rating agency Flitch downgraded Namibia’s outlook from stable to negative. Flitch’s rating agency downgrade primarily affects bond yields and, therefore, bond-heavy portfolios. A downgrade also means that government bonds are much more risky than they were before, therefore bondholders will try every means to reorganize their portfolios to hedge the risk associated with bonds as they fear a likelihood of credit default.
The Bank of Namibia (BoN) increased the repo rate to 4.75% on June 15, 2022, a move that caused a wave of public discontent, especially for people planning to acquire a property and those who are already managing their mortgages. This action has also had an impact on the government as it has to service its debt instruments, which leads it to pay more than the standard installments.
For investors who have previously subscribed to bonds, the interest payments or coupon rate of the bond are tied to prevailing interest rates in the economy. Since most bonds have a fixed coupon rate, they are assumed to remain constant despite fluctuations in market interest rates. When interest rates rise, new bonds issued have a higher coupon rate and thus provide more income to the investor.
Given data from the World Government Bond Index (WGBI), Namibia’s 10-year government bond yields 12.17%, while the 10-year government bond of South Africa has a yield of 10.60%. It can be analyzed that Namibian government bonds are more desirable than South African bonds, which perhaps explains the growing demand for Namibian bonds.
The scrutiny could be heightened as some investors will debate the risk perspective on the sustainability of public debt, but that entirely depends on their portfolio’s risk tolerance. However, it was a stunning discovery that in June 2022, the Namibian bond market performed better than the equity market in terms of subscriptions. According to a newspaper article written by Lazarus Amukeshe, investors in Namibia have offered to subscribe a whopping N$27 billion, while the government has asked to raise N$665 million, which is an oversubscription of 816 million Namibian dollars (379%).
Unfortunately, this was not the case for the equity market where N$438 million worth of shares were traded during this period. These professions constitute the activity of the local and global stock market. About 18 of the respective 32 shares of NSX-listed companies were sold by investors fearful of bearing the risk of losing their invested capital, indicating that up to 60% of listed companies recorded an average loss of 19.79 % during the period considered. .
Finally, Warren Buffet (1985) once expressed the rules of investing: “Rule #1: Never lose money. Rule #2: Never forget rule #1. Investors in Namibia are inclined to use low risk/moderate to high reward strategies in their portfolios, hence why government bonds are attractive during this period. They should adhere to their clients’ investment policy statement (IPS) to determine the risk profile, tolerance and required returns, but that’s a conversation for another day. In conclusion, bonds are the “safe haven” investors need to hedge risk while generating alpha.