Bond yields are likely to decrease-analysts

During 2022, rising inflation and interest rates led to bond yield increases. The yield on the Namibian 10-year bond increased by 16bps and in general bond yields rose 141bps across the yield curve between January and December 2022, according to Simonis Storm.

With the opposite expected for 2023 in terms of inflation and interest rates, bond yields are likely to decrease as local investors’ factor in lower inflation expectations and perceive lower fiscal risk on the back of improved tax revenues and improved economic growth forecasts.

“We do not foresee any credit rating downgrades from Moody’s and Fitch in the near future.” However, bonds are likely to offer attractive real yields as inflation also decreases. Resilient local demand – especially from banks who increase their investment holdings faster than loan advances due to risk aversion – could also add downward pressure on bond yields in 2023.

“Given our gradual view on interest rate normalisation for 2023, we expect interest rates/yields on money market instruments such as Treasury Bills (TBs), fixed deposits and Negotiable Certificates of Deposits (NCDs) to remain relatively stable in 2023,” Simonis Storm said.

During 2022, the 12-month TB yield rose from 5.75% to 9.10% (335bps), the 12-month fixed deposit increased by 284bps from 5.61% to 8.45% and the 12-month NCD increased by 314bps from 5.69% to 8.83%.

Sentiment in global financial markets will likely be driven primarily by economic data in the US, more specifically, US inflation data and the pace at which it slows as this will determine when interest rates peak and determine the severity of potential recessions in advanced economies. As a result, the US job market might be one of the most watched economic indicators during 2023.

According to Deutsche Bank, the era of there is no alternative (TINA) to equities is over and after the bond yield moves of 2022, together with the current market setting, has changed to there are plenty of alternatives (TAPA) to equities which has also led to lower equity valuations, Simonis Storm pointed out.

Stocks

Stock markets – being forward looking mechanisms – typically turn before the economy and would have priced in most of the negative effects of potential recessions to take place in 2023. With that said, certain investment analysts predict single digit increases in global stock market indices for 2023. Although defensive stocks could continue to outperform over the short-term, valuations are starting to look more attractive for cyclical and value-oriented stocks. Financials are likely to benefit from high interest rates, energy and oil mining companies could benefit from elevated oil prices and improved growth in China should benefit numerous European companies and Emerging Markets.

Corporate earnings improved significantly, up over 20% on average amongst certain Namibia Stock Exchange (NSX) primary listed stocks during 2022.

“However, the nature of our illiquid equity market led to major drops in share prices of Standard Bank (28.1%), MTC (20.9%) and Namibia Breweries (7.1%) which led to an overall -4.2% performance on the NSX Local Index for 2022.”

On the other hand, top gainers for 2022 include Letshego, which increased by (53.1%), Oryx Properties (14.6%) and Firstrand (10.2%).

Average P/E ratios on the NSX Local Index increased from 7.1x to 9.0x on average from 2021 to 2022 according to Bloomberg data. This remains below the long run average of 10.2x, implying that local stocks are valued on the low side.

“Our in house forecasts on stocks we cover point to a general increase in earnings for 2023, implying that there are good buying opportunities on the local bourse. We are most optimistic on the local banks and consumer staple sectors on the NSX for 2023,” Simonis Storm said.