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.