Why credit remains one of Prowess’s key performance levers, and what to watch as we head toward our new credit offering.
South African credit has repriced from “cheap and overlooked” to “tight but still workable” — the opportunity has moved from broad exposure to careful selection.
Is Credit Expensive Right Now?
By most conventional measures, yes, at the index level. 2025 was an exceptional year for South African fixed income, with the FTSE/JSE All Bond Index returning over 24%, and corporate credit spreads compressing sharply alongside it. Senior bank spreads tightened by as much as 21 basis points over the year, while Additional Tier 1 bank capital spreads narrowed by around 51 basis points.
A decade ago, you were pricing SA credit through some of the worst points in the country’s fiscal and political history with events like ‘Nenegate’ in December 2015, the S&P/Fitch downgrade to sub-investment grade in April 2017, the further slide to full junk status (Moody’s) in 2020, and the COVID shock itself.
Spreads have recently been driven by an improving fiscal outlook, including South Africa’s exit from the FATF grey list, and a rating upgrade from S&P. Investor appetite has also been a substantial driver of lower spreads with growing pools of money chasing limited paper meaning that demand has consistently outstripped the supply of paper.
The practical consequence is that broad-market credit spreads are now sitting at multi-year lows. The extra yield investors earn for taking on credit risk over government debt is historically thin, and the market can reasonably be described as “priced for stability.” That said, expensive at the index level does not mean expensive everywhere. A more granular, credit-by-credit approach continues to uncover pockets of genuine value, issuers whose fundamentals justify a yield premium that the broader market has already compressed away for their peers.
Where Is the Value — And why do we remain constructive on credit as an asset class?
We like the stable returns, low volatility and low correlation to other asset classes, like equities and property, that credit provides. With capital gains from further spread compression largely behind us, 2026 is shaping up as a market where security selection, not beta, drives returns. Credit investment is as much judgement and experience as it is modelling: the ability to take considered risk, identify opportunities and avoid pitfalls is what separates outcomes in this market. Most recent corporate credit events have been linked to the integrity or quality of management teams rather than the broader economic backdrop. This is exactly why judgement and experience are critical and matter more than spread levels alone.
A few areas of opportunity stand out for us:
We like non-cyclical sectors and corporates
We are focused on established businesses with annuity revenue streams that are more resilient through periods of economic stress.
Banks and financial institutions
South African banks have benefited from tighter underwriting and stabilising bad debts; recent banking results have noted that non-performing loans peaked in the second half of 2024 and credit loss ratios have since normalised. Senior and subordinated bank paper remains a core holding for income-focused portfolios, though spreads here have tightened the most and require the most selectivity.
Infrastructure and private credit
This is arguably the most compelling structural opportunity in the local credit market. As bank lending remains constrained by Basel III capital requirements and government finances stay tight, a widening financing gap has opened for specialised private lenders. Infrastructure debt, spanning energy, water, digital infrastructure, transport and housing, offers investors long-dated, often senior-secured exposure with structural downside protection, and returns that are less correlated to listed market volatility. Local private equity managers are following the trend too: a recent SAVCA survey found 86% of firms are now considering or actively pursuing private credit strategies, up sharply from 50% a year earlier.
Why Credit Remains a Key Performance Lever for Prowess
Credit has consistently been one of the more reliable contributors to portfolio performance across market cycles, and this environment reinforces rather than diminishes that role. Our investment team is positioning portfolios around two principles:
- Selectivity over beta: with average spreads tight, we are concentrating exposure in issuers where fundamentals, not just yield, justify the position, rather than taking broad market exposure for its own sake.
- Diversifying into private and infrastructure credit: we see this as the most attractive structural opportunity in the local market today, offering differentiated income, lower correlation to listed markets, and exposure to South Africa’s genuine infrastructure funding needs.
This disciplined, credit-selection-led approach underpins our credit philosophy. Our capabilities can be customised to give clients structured access to the areas of the market we believe offer the best risk-adjusted value today, from high-quality corporate and bank paper through to private and infrastructure debt opportunities that are typically difficult for individual investors to access directly. Our expertise provides an array of investment opportunities that can cater for different risk-return preferences.
Our Forward-Looking View
We expect 2026 to be a year of “selective optimism” for South African credit: a supportive macro backdrop of moderating inflation, further monetary easing, and a stabilising fiscal position, set against a market that is no longer cheap and has little room for error. The days of easy capital gains from spread compression are largely over. Performance from here will be earned through security selection, patient positioning around the year’s heavy redemption calendar, and a willingness to look beyond listed markets into private and infrastructure credit, where the structural opportunity set remains genuinely attractive.
For clients, the key takeaway is this. Credit is not “cheap” right now, but it is far from unattractive, provided exposure is built issuer by issuer, with active management distinguishing between the resilient majority and the pockets of real stress. That is exactly the discipline our team applies today, and the philosophy behind our credit process.