September started on a low note for local markets as foreigners sold a net R1.2 billion worth of domestic bonds and shares on Monday. According to figures from Citi, the day’s sales eroded most of the gains last month, when foreigners bought a net R1.9bn worth of local securities.
In the year to date, foreigners have invested only R31.6bn in portfolio purchases, compared with R66.5bn in the same period last year.
The reduced flows have contributed to the currency weakness which has sent the rand from R8.54 to the dollar at the start of the year to be bid at R10.3421 at 5pm yesterday.
The decline in non-resident investment is part of a broader global pattern, after the US Federal Reserve’s decision to start cutting its routine liquidity injections into the US economy from as soon as this month. Anticipating the phasing out of an era of cheap money, investors are pulling their funds out of emerging markets.
Ahead of the Group of 20 meeting in Moscow tomorrow, President Jacob Zuma warned: “The current volatility of emerging market currencies shows decisions taken by countries based solely on their own national interest can have serious implication for other nations. There must be a greater recognition that we live in an interconnected world. It is for this reason that South Africa joins a call by emerging markets and developing countries for more carefully considered global collective action in response to the crisis.”
The Fed’s move to tighten monetary policy was prompted by stronger growth in the US, which in itself attracts global investors.
Meanwhile, the adverse flows have slowed momentum in emerging economies in recent months, reinforcing the shift of investment back into the major advanced economies.
A report yesterday from the Organisation for Economic Co-operation and Development (OECD) said: “A moderate recovery is under way in the major advanced economies. Growth is proceeding at encouraging rates in North America, Japan and the UK. The euro area as a whole is out of recession, although output remains weak in a number of countries.”
In contrast, the report noted: “Growth has slowed in some of the large emerging economies. One factor has been a rise in global bond yields – triggered in part by an expected scaling back of the US Federal Reserve’s quantitative easing – which has fuelled market instability and capital outflows in a number of major emerging economies.”
Some analysts believe the worst may be over for emerging markets after encouraging data from China at the weekend, reflecting an improvement in manufacturing.
The OECD predicted yesterday that growth in China would “pick up to about 8 percent by the final quarter” of this year. And Goldman Sachs revised its 2013 forecast for China to 7.6 percent from 7.4 percent, “amid improving global demand”, Bloomberg reported.
However, the damage inflicted by currency outflows will not be reversed quickly. India has been a major casualty. Bloomberg reported yesterday that India’s rupee fell more than 3 percent as Standard & Poor’s reiterated that it saw at least a one-in-three probability that its sovereign rating would be downgraded to junk.