South African Rand coins are seen in this photo illustration

Johannesburg - As the rand tumbled and bond yields surged while South Africa’s political drama unfolded, not all investors ran for the exit.

Foreigners bought a net R11.2 billion of South African bonds in the week ending March 31, more than double the previous week and the most since the five days ending June 24, according to Johannesburg Stock Exchange data. The inflows continued even after President Jacob Zuma fired Finance Minister Pravin Gordhan on Thursday.

Zuma’s cabinet changes raised concern about the country’s fiscal path and credit ratings, sending the rand sliding to its worst week since December 2015 and benchmark bond yields to the highest since January. That makes them a buy, said Phoenix Kalen, London-based director of emerging-market strategy at Societe Generale.

“Despite the fraught political situation in which South Africa currently finds itself, dynamics past the immediate horizon favour outperformance in the country’s assets,” Kalen said in a note released March 31 in which he advised buying the country’s 2048 rand bonds. “Although we believe sovereign rating downgrades are likely over the near term, we do not anticipate substantial further market upheaval when or if they materialise.”

Read also: Assets tumble on Gordhan sacking

Gordhan had fended off a downgrade in South Africa’s rating to junk, and his commitment to curb spending and government debt had endeared him to investors. But he clashed with Zuma over the affordability of building nuclear power plants and the management of state-owned companies. His successor, Malusi Gigaba, said Saturday he would push for “radical economic transformation” while pledging to stick to the fiscal framework of the February budget.

Rich enough

Inflows into emerging-market bonds surged in March after the Federal Reserve reassured investors about the path of US rate increases. While Zuma’s cabinet reshuffle has raised the political stakes, the nation’s yields - the highest among investment-rated sovereigns - are rich enough to compensate investors for the increased risks, Sergio Trigo Paz, the London-based head of emerging-market debt at BlackRock Inc., said March 29.

“Yields in South Africa still look attractive given contained inflation,” UBS strategists led by Manik Narain wrote in a note March 31. “This is the first asset we would buy.” UBS said it would consider long positions in South African 10-year bonds at a yield of between 9.3 percent and 9.5 percent, while hedging the currency exposure. The yield rose eight basis points to 8.8 percent on Monday after soaring 39 points Friday.

In June, the last time foreigners bought South African bonds at this rate, things were looking much better for Africa’s most-industrialized economy. The country avoided a credit rating cut to sub-investment grade when S&P Global Ratings and Fitch Ratings opted to affirm their BBB- assessments, while inflation had slowed for a third consecutive month.

Investors who bought the bonds then would have earned a return of 14 percent, including the currency gain, according to data compiled by Bloomberg. This time round, the outlook is less certain, with the predicted return less than 1 percent over the next year based on current interest rates and forecasts for the currency.

A lot hinges on the rand. If the currency extends its decline, that would erode returns for foreign investors. Some, like Lutz Roehmeyer, a fund manager at Landesbank Berlin Investment GmbH in Berlin, would prefer to wait for that to happen before getting back into South African bonds. The currency weakened 1.3 percent to 13.5929 per dollar by 11:25 a.m. in Johannesburg on Monday.

“It will get interesting again at about 16 to 17 against the euro,” Roehmeyer said March 30. If the rand reaches that level, “of course we’d come back in. We live on carry and, in this case, I’d imagine we could easily get double-digit rates,” he said.