Johannesburg - Flows in and out of emerging markets will be volatile in the months ahead as investors try to guess the US Federal Reserve’s next move.
The Fed’s delay in phasing out its easy money policy last week brought funds back to emerging markets – a reversal of the trend since May, when Fed chairman Ben Bernanke first signalled he would end his quantitative easing (QE) policy.
The shift is reflected in the rand, which has strengthened from R10.40 to the dollar little more than a month ago to just under R9.87 on Friday.
South Africa has seen an abrupt turnaround in flows from abroad this month after R3.2 billion net sales of local bonds and shares by September 9, according to data from Citi. Fortunes changed the next day when a net R2.8bn came in. And, over the 10 days to Thursday, non-residents bought a net R15.6bn of local securities – a big improvement on last month’s net purchases of just R1.9bn.
The direction of flows turns on US monetary policy. Cheap money encourages investors to take risks in emerging markets in the hope of getting higher returns, while the phasing out of QE will suck the funds out.
Reserve Bank governor Gill Marcus noted last week that foreigners sold a net R17.9bn in local bonds between May and August “in reaction to the Fed tapering announcement”.
A further complication is that Bernanke’s term ends in January and his successor is not known. Janet Yellen, who has served in several capacities at the Fed, is seen as the front runner and favoured by markets for her dovish stance on monetary policy. This is in contrast to the earlier race leader, former Treasury secretary Larry Summers, who was known to take a tougher line. The rand strengthened, along with similar currencies, on news of Summers’ withdrawal last week
Apart from the uncertainty surrounding Bernanke’s successor, Bank of America Merrill Lynch notes that US Treasury yields tend to rise “around transitions in the Fed chair” – presumably because of uncertainty about future monetary policy. Higher US yields are bad for emerging markets.
Meanwhile, there are attractions in emerging markets. Bank of America Merrill Lynch estimated last week that emerging market shares were 20 percent undervalued.
But, unlike most emerging markets, the JSE continued to make strong gains through the bad times so it may benefit less as peer countries return to favour. The all share index has risen 10 percent so far this year to 44 094 points on Friday.
Cannon Asset Managers chief executive Geoff Blount pointed out recently that, since January last year, the JSE had risen a “superlative 38.7 percent to a near all-time high, despite a tottering global economy”.
He said it was driven up by a “particularly narrow set of stocks that in our view were already steep and have become increasingly expensive. Two-thirds of this remarkable return is explained by just three stocks – Richemont, Naspers and SABMiller – which contributed a staggering 25 percentage points of the 38.7 percent return.” - Business Report