South African bonds as an alternative diversification asset for developed bond markets

Abstract

Orientation: Globalisation of financial markets has made it progressively more difficult for effective diversification to exist, and as a result portfolio managers are in need of alternative diversification opportunities.

Research purpose: Developed financial markets are more likely to be integrated with one another, and better diversification opportunities may be found in emerging markets.

Research motivation: Limited research focuses on bond market diversification, and most research does not include South Africa as a diversification destination. This research examines whether developed bond market investors could use South African bonds to diversify their portfolios.

Research design, approach and method: This article follows a quantitative research design with a causal-comparative or quasi-experimental approach. The econometric method used was primarily co-integration analysis establishing whether diversification opportunities exist between the South African bond market and five developed bond markets.

Main findings: Overall, the findings showed that there was no co-integrating relationship between the South African bond market and developed bond markets, indicating that diversification may be possible in the long term. Furthermore, it was found that the South African bonds were less affected by short-term shocks compared with the developed market bonds.

Practical/managerial implications: The results of this study indicated that South African bonds can be used to diversify a developed bond market investors portfolio. Developed bond market traders and fund managers should therefore consider holding South African bonds as a means of reducing their portfolio’s overall risk.

Contribution/value-add: Holding South African bonds can be used to preserve a portfolio’s long-term wealth. Additionally, the resistance of South African bonds to short-run shocks also provides investors with a cushion against sudden and unexpected crises.