South African Bonds Top Stocks for First Time Since Apartheid Ended in '94
South African bonds lured more foreign inflows in 2010 than shares for the first time after the fall of apartheid in 1994 as yields more than double those of 10-year U.S. Treasuries boosted the appeal of the debt.
Net foreign purchases of local-currency government bonds surged to 61 billion rand ($9.2 billion) from 26.5 billion rand in 2009, according to the JSE Ltd., which operates South Africa’s exchanges. That compares with 35.6 billion rand of net equity purchases by international investors, down from a record 75.4 billion rand, according to the data.
“South African bonds offer some of the highest yields around,” said Leon Myburgh, a fixed-income strategist for sub- Saharan Africa at Citigroup Inc.’s Johannesburg-based unit. “Slowing inflation and declining interest rates made them a very attractive investment.”
The debt-buying spree will continue through 2011, said Jacques Theron, a portfolio manager at Johannesburg-based Absa Asset Management Private Clients, a unit of the nation’s largest retail bank. With its benchmark interest rate at 5.5 percent and inflation near a five-year low, South Africa’s central bank is among a few worldwide that have room to cut rates, he said.
Local-currency, emerging-market debt has rallied from Indonesia to Brazil as interest rates at near-zero levels in industrialized nations encouraged investors to seek out better returns in developing markets. The spread, or yield difference, between 10-year South African bonds and U.S. debt of similar maturity was last at 480 basis points, from almost 535 at the start of the year, according to data compiled by Bloomberg.
Prudent Fiscal Management
Inflation in Africa’s biggest economy averaged 3.5 percent in the five months through November as the rand’s surge to best- performing emerging-market currency versus the dollar since the start of 2009 reduced the cost of imports. That enabled the central bank to lower its main lending rate on Nov. 18 for the ninth time since December 2008 to the lowest level since 1999.
“The country’s prudent debt metrics have also been a factor,” said Trevor Barsdorf, an analyst at Econometrix Treasury Management, a Johannesburg-based bond and foreign- exchange adviser.
Finance Minister Pravin Gordhan said on Oct. 27 that South Africa will trim its budget deficit to 5.3 percent of gross domestic product, down from a February estimate of 6.2 percent, in line with aims to cut it to 3.2 percent in fiscal 2014. South Africa’s deficit compares with shortfalls as high as 15.4 percent of GDP in Greece and 14.4 percent in Ireland in 2009.
The combination of slowing inflation and falling rates, helped South African bonds return more than 26 percent in 2010 in dollar terms, the third-best performers after Colombia and Indonesia, based on available index data from JPMorgan Chase & Co. South Africa’s FTSE/JSE Africa All Share Index returned more than 29 percent in 2010, when measured in U.S. currency.
Investors also preferred bonds over stocks due to concerns that the global economy may stall, Citigroup’s Myburgh said.
South African stocks were boosted by takeovers, including Wal-Mart Stores Inc.’s acquisition of a controlling stake in Massmart Holdings Ltd., and Nippon Telegraph & Telephone Corp.’s purchase of Dimension Data Plc. Massmart was the second-best performer on the FTSE/JSE Africa TOP40 Index in 2010, advancing more than 64 percent.
Net foreign inflows into South African bonds in 2010, which exceeded the cumulative purchases of the 15 previous years, helped the rand extend gains versus the dollar since the start of 2009 to 42 percent.
Not everyone expects money to continue pouring into the country’s bond market.
“There are some headwinds,” said Manik Narain, an emerging-markets strategist at UBS AG in London. “Inflation has bottomed and will begin to pick up.”
UBS expects South Africa to raise rates by 50 basis points in 2011, causing foreign purchases of bonds to slow, which will help weaken the rand to an estimated 7.60 per dollar by the end of next year.
“The best of the inflows into South African bonds is behind us,” Narain said.
Much of what happens in South Africa’s bond market will hinge on the performance of the rand.
The rand will probably strengthen to 6 per dollar over the next 12 months, with the risk of the currency appreciating to as strong as 5.5, said ETM’s Barsdorf. That would push inflation to below the central bank’s 3 percent lower limit, enabling policy makers to cut rates by 50 to 100 basis points during 2011.
Investors can “pencil in” the likelihood of another $4 billion of foreign inflows into South African bonds in 2011 from dedicated local-currency emerging-market debt funds alone, said Werner Gey van Pittius, who helps manage about $70 billion as a portfolio manager at Investec Asset Management in London.
“I can’t see too many reasons not to be bullish on South African bonds,” he said. “We can’t see an aggressive sell-off on the horizon unless there’s a massive risk-aversion event.”
Annual Net Foreign Purchases of South African Bonds (in rand) 2010: 61.00 billion (to Dec. 30) 2009: 26.54 billion 2008: -15.98 billion 2007: 2.15 billion 2006: 20.50 billion 2005: -5.00 billion 2004: 3.00 billion 2003: -5.40 billion 2002: 0.20 billion 2001: -26.51 billion 2000: -20.53 billion 1999: 14.34 billion 1998: -9.77 billion 1997: 14.78 billion 1996: 3.81 billion 1995: 4.76 billion* Annual Net Foreign Purchases of South African Stocks 2010: 35.59 billion (to Dec. 30) 2009: 75.43 billion 2008: -54.44 billion 2007: 63.29 billion 2006: 73.7 billion 2005: 50.19 billion 2004: 32.90 billion 2003: -0.43 billion 2002: -4.92 billion 2001: 29.7 billion 2000: 17.4 billion 1999: 40.6 billion 1998: 42.3 billion 1997: 26.2 billion 1996: 5.25 billion 1995: 4.81 billion* Source: JSE Ltd. * Covers period from June through December following the March 1995 abolition of the financial rand, which was previously used for foreign capital transactions. Since 1995 when stocks and bonds both had positive foreign flows, the measure on which the data for the story was calculated, shares lured more buyers than debt in eight of the years.
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