Foreign investors pile into SA

Ray Mahlaka Moneyweb

Everyone knows SA’s teetering on a fiscal cliff, yet foreign investors aren’t running for the exits.

According to JSE data, foreigners bought a net R69.5 billion of SA bonds (mainly the R186 10-year government bond) in the year-to-end September 2017.

Although the wave of bad news continues, the global search for an attractive yield by cash-flush foreigners has intensified, pointing them to the local bond market.

“Foreigners take a different view on emerging markets risk than people living in emerging markets do. Foreigners are used to political turmoil, junk status downgrades and uncertainty,” said Wayne McCurrie of Ashburton Investments.

SA’s current 10-year bond yield at 8.6% is more attractive than emerging market peers, including Russia, India and Indonesia. This is why foreign inflows have continued, coupled with SA’s bond market that is exceptionally liquid and sophisticated, allowing investors to get out quickly.

“No matter what the politics are in SA, our government is not about to renege on its debt. We are still a mile away from that and foreigners believe that they will get paid,” said McCurrie.

Note, foreign inflows don’t mean investors are comfortable with SA’s economic fundamentals and political uncertainty.

“Those concerns are all there, but that is not the main driver when it comes to their investments. SA is attracting a lot of money but we remain vulnerable because the fundamentals are weak and not good,” said Kevin Lings at Stanlib. Undervalued rand

SA bonds are receiving their fair share of inflows in the wake of an improved sentiment towards emerging markets.

Emerging markets inflows have been under pressure since 2015. However, China’s economy grew, Brazil and Russia came out of a recession and the US Fed now expects a gradual rise in interest rates. This re-energised investment flows into emerging markets.

Although SA’s prospects remain precarious, the rand has remained resilient, trading in a narrow range of R12.50/$ to R13.50/$. Market watchers consider the rand to be undervalued, which has made local bonds attractive for foreigners.