Market Update: Bonds Cheer the Budget, Shares Mixed
“In the short run, the market is a voting machine but in the long run it is a weighing machine.” (Benjamin Graham)
Benjamin Graham’s renowned quote captures the market’s response to October’s Medium-Term Budget. The father of value investing can’t have been surprised as bond investors weighed the budget’s credibility years into the future, while equity investors were voting on this year’s GDP growth downgrade.
What the budget delivered
Bond investors got what they care about most. The Medium-Term Budget Policy Statement introduced the fiscal anchor, backed it with a bond buyback and trimmed weekly auction supply, all of which reduce the risk that government borrowing keeps outrunning its ability to pay. The 2035 bond yield fell about 14.5 basis points to 8.59%, while the 2048 yield dropped around 18 basis points.
Why bonds applauded, and shares did not
- Bonds price sovereign credit, supply and real yield. A credible budget improves all three, and with the repo rate at 7.25% and inflation at 4.5%, South African bonds still offer a generous real return.
- Equities price in growth and earnings, and the budget offered little new on either front, with the economy contracting 0.2% in the second quarter and 2026 growth forecast reduced to 1.2% versus February’s 1.6% estimate.
- With the JSE largely driven by global factors, gold and platinum miners, Naspers, Prosus, and Tencent responded to metal prices, while big-tech sentiment mattered most. As a result, the JSE Top 40 slipped just 0.4% on budget day, then fell more than 1% the following day as chip, metals, and oil sentiment drove the decline.
- Consumer-facing shares retreated as a lower growth rate this year, combined with the fuel-price shock and high borrowing costs, is expected to weigh on household spending, and a better bond market won’t alleviate spending conditions overnight.
The broader backdrop
Globally, the Federal Reserve has lifted rates to a target range of 3.75 to 4.00%, US inflation is 3.7%, and oil is trading at US$100 to $110 on the ongoing Strait of Hormuz disruptions. The US 10-year yield near 5.3% is pressuring stretched valuations, and October’s sell-off in AI and chip shares shows how concentrated the rally has become.
At home, the JSE has declined about 7% year-to-date after surging 39% in 2025, while bonds were considered relatively cheap for the risk, allowing yields to fall on the day.
How to navigate the risks
- Stay diversified. Bonds and equities are answering different questions, so holding both is the point, not a compromise.
- Do not chase the relief rally. Fiscal credibility is earned over years.
- Remember that inflationary pressure still predominates globally, so the risk of higher rates going forward remains to the upside.
- Keep equity exposure tied to goals and time horizons, not to the budget headline.
The bottom line from October was that a good budget lowers the cost of South Africa’s debt. But it does not, on its own, raise the earnings of its companies.
*All facts and figures accurate at time of writing.
Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact us for specific and detailed advice.
© FinDotNews
