Investors pile into SA government bonds

‘Even with the inflation rate above 6%, SA bond yields higher than 9% remained attractive.’

IT IS NOW you see it, now you don’t, when it comes to South African investment flows.

As the country’s growth outlook worsens, foreign investors are piling into government bonds to profit from junk-level returns on debt that is rated investment grade.

Yet all of that money is flowing out again as investors dump stocks at the fastest pace in at least 10 years.

Foreigners have bought a net R35.7 billion of South African government debt this year, while selling R35.6bn of stocks, according to securities exchange data up to April 22.

South African local bonds have provided the third best returns among 31 emerging market nations’ debt this year, with benchmark 10-year yields the highest after Russia and Brazil out of 27 developing nations tracked by Bloomberg.

Cut twice

The country’s growth forecast has been cut twice this year by the International Monetary Fund (IMF), as low commodity prices, rising borrowing costs and a drought weigh on the economy. President Jacob Zuma’s decision to fire his finance minister in December made matters worse, raising questions of his commitment to fiscal targets.

With interest rates near or below zero in many developed nations, South African yields, which are higher than those of junk-rated Russia, are looking an attractive alternative to stocks, according to Pioneer Investment Management.

“Growth has been downgraded, the tendency is that the equity market is negatively affected and duration risk takers are becoming more brave,” Hakan Aksoy, a bond fund manager at London-based Pioneer, said. “The overall rate market is quite dovish, rates are going down”, fuelling demand for South African bonds.

The economy last year expanded at the lowest rate since a recession in 2009 and is set to post just 0.8 percent growth this year, according to Reserve Bank forecasts.

The IMF is even more pessimistic about growth in the local economy, cutting its forecast for the year to 0.6 percent on April 12, from 0.7 percent in January.

The worst drought in a century has boosted food prices, pushing inflation above the Reserve Bank’s 3 percent to 6 percent target range. A persistent breach would require a further policy response after the bank raised the benchmark rate by 1.25 basis points since July, deputy governor Daniel Mminele said last week.

Mokgatla Madisha, the head of fixed-income investments at Argon Asset Management in Cape Town, said that would leave consumers with less to spend, affecting corporate earnings. “Growth in South Africa is continuously being revised down, so if you’re an equity investor looking to take advantage of South African growth, or even growth on the continent, you’ll probably be a little bit disappointed,” he said.

Even with the inflation rate above 6 percent, South African bond yields higher than 9 percent remained attractive to investors, he said.

Those yields are also high enough to compensate investors for the risk of a credit rating downgrade to junk.

South African government bonds have returned 7.7 percent this year, compared with the 3.1 percent return for the benchmark stock index.

Yields on benchmark securities maturing in December 2026 fell 2 basis points to 9.07 percent by 12.25pm in Johannesburg yesterday, bringing its decline this year to 72 basis points. – Bloomberg