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Retreat from emerging markets

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Cape Town - The recent bullish run by emerging markets with their equities and bonds posting solid gains, and most currencies making headway against the greenback, was about to come to an abrupt halt.

UK-based economic research consultancy Capital Economics has said the economic factors that aided emerging markets (EM) in the past few months were beginning to dissipate.

“For a start, we doubt that many of the factors which have helped EM equities to leave their developed market peers trailing in their wake recently are likely to be repeated,” Capital Economics chief markets economist John Higgins said.

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Finance Minister Malusi Gigaba. Markets expect him to respect the current policy framework. Photo: Reuters

“These include the fading of fears of greater US protectionism, a marked improvement in economic data (especially in Asia), and one-off political events in India and Korea.” Higgins said the current political events in South Africa showed how vulnerable emerging markets could be.

“The rand’s recent falls also serve as a reminder that emerging markets assets remain exposed to flare-ups in political risk.” South Africa's currency had until recently had the best performing currency among its emerging markets peers.

In the past year the rand appreciated almost 20 percent, while in the same period the MSCI Emerging Markets Currency Index appreciated just 9percent while JP Morgan’s similar index appreciated a mere 5 percent in the same period.

Higgins said South Africa was found to have the worst performing local currency government bonds among the emerging markets in the past month and expected Russia’s local currency bonds to keep performing well against its peers.

“According to the JPMorgan GBI-EM Broad, local currency government bonds returned around 1percent between March 7 and April 10 (stripping out movements in exchange rates). Latin America was the best-performing region overall, but every country in the index bar South Africa produced a positive return.” The SA bond markets have had their fair share of bad weather in the past few years.

The bond market has seen yields bottom out at 6.9 percent in May 2013 and sell-off to a peak of 10.5 percent in December 2015 after the replacement of then-finance minister Nhlanhla Nene.

Most recently, the 10-year generic yield for South African government bonds had strengthened from 9.20 percent January last to 8.79 percent in February 2017. According to the National Treasury, South Africa has around R2.2 trillion in government debt, with about R220 billion in foreign currency, such as dollars and euros.

Earlier this week, analysts at Citibank said foreign investors had acquired R20 billion worth of South Africa’s government bond since late March when President Jacob Zuma cut short former Finance Minister Pravin Gordhan’s international investor roadshow which later led to his axing. The bank said R9.8 billion of this was invested last week alone in the wake of the ratings downgrade.

Africa economist at Capital Economics John Ashbourne said the markets were looking at new Finance Minister Malusi Gigaba to respect the current policy framework. “Gigaba’s first big test will be October’s medium-term Budget policy statement. The speech will be the new minister’s opportunity to lay out his own policy agenda, including the first official spending plans for 2020/21.

"We’ve always thought that the current deficit targets are a bit unrealistic and expect that Mr Gigaba will probably nudge up his borrowing plans,” Ashbourne said.

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