Foreign investors pause

Published Nov 22, 2010


Investors abroad are rethinking the relative attractions of South African bonds and equities. For most of the year funds from abroad poured into local bonds. By the end of September investors had placed a net R68.7 billion in bonds but in October the pattern changed and by Thursday last week they had sold a net R2.2bn since the start of October.

However, flows into local shares have picked up. After buying R21.7bn in the first 10 months of the year, investors have pushed R7.4bn into the market in the month so far. The figures are from the JSE.

The boom in emerging market bonds may have run its course. Franklin Templeton, a London-based portfolio manager, is betting on emerging market currencies but avoiding local currency debt because interest rates are expected to rise in a number of countries, according to a Bloomberg report on Friday.

The emerging market bond boom was sparked by the slow growth and low interest rates in advanced economies. Investors took advantage of the low interest rates abroad to borrow cheaply and invest for higher returns. Maarten Ackerman, a senior investment strategist at Citadel, says local bonds offer yields of more than 7 percent versus 2.5 percent abroad.

But he says bonds will become less attractive because most markets are close to the bottom of the interest rate cycle.

Though the current yields are locked in to maturity, investors who want to sell the bonds in the secondary market incur a capital loss when yields go up. The reason: on the upward leg of the interest rate cycle, other investments might offer better returns, so investors think twice about buying bonds. This reduces demand and therefore depresses prices.

The rate rising cycle is still way down the line in South Africa but we too are at or close to the bottom of the cycle and investors think ahead. So they are looking for other opportunities.

Ackerman says investors assume emerging markets will grow faster than advanced economies, which, on the face of it, means their companies will offer better returns. And he describes South Africa, with its efficient and liquid markets, as a proxy for emerging markets.

His own view is that investors are not reading the situation correctly. Growth in many developing economies owes much to family businesses and informal operators and the performance of listed companies often disappoints.

“Emerging markets on average recorded economic growth of about 4 percent over the past few years while companies only recorded profit growth half of that. In China over the past decade economic growth was about 10 percent, while company earnings growth was only about 2 percent,” he says.

In contrast large multinationals based in advanced economies often have good exposure to consumer demand in the high-growth countries, he says.

However perceptions are paramount.

Fortunately last week’s scare over Ireland’s inability to pay its debt hasn’t made much of a dent in the local market. When sovereign risk problems reached crisis point in Greece in April, stock markets and emerging market currencies took a pounding. The JSE all share index fell to 26 000 points by mid-year and the rand went to R8 to the dollar late in May.

But after renewed signs of euro zone instability at the start of the week the damage was limited. The rand weakened from R6.9 to the dollar on Monday to R7.1 on Tuesday. And the JSE all share index fell from 31 816 points to 31 419. On Friday the rand was bid at R7.0175 at 5pm and the all share closed at 31 398.82 points. - Ethel Hazelhurst

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