Inflows Not Seen Since 2002 Show Hunt for Yields in South Africa

  • Foreigners have bought local stocks for 24 days in a row
  • Funds flowing to emerging markets, Nomura’s Montalto says

South African stocks haven’t registered such a sequence of daily purchases by foreigners in more than 14 years, as a search for higher-yielding assets that started before the U.K.’s vote to leave the European Union persists.

Foreigners were net buyers of South African equities for a 24th consecutive day on Wednesday, the longest stretch since January 2002, figures from the Johannesburg Stock Exchange show. The benchmark index has tumbled 5.4 percent over the same period.

Emerging markets have witnessed wide swings in the aftermath of the U.K.’s June 23 Brexit vote as investors assessed its impact on the world economy amid speculation that major central banks will add stimulus. Evidence has increased that the Federal Reserve will refrain from tightening policy anytime soon amid rising uncertainty about the outlook for growth in the U.S. and abroad.

“There was a realization even before the Brexit vote that monetary policy would be looser for longer in the developed markets,” Peter Attard Montalto, Nomura’s senior emerging-markets strategist, said Thursday by phone from London. “There would be a lot more money flowing into emerging-market funds -- funds that were all sitting slightly underweight South Africa, a little bit long of cash.”

Foreign investors aren’t drawn to South Africa by optimism over the outlook for the country, Montalto said. The International Monetary Fund on Thursday cut its forecast for growth in the continent’s most industrialized economy this year to 0.1 percent from 0.6 percent.

“It’s very much external driving factors as opposed to anything particularly domestic; I don’t think anyone is buying into the South African domestic story,” Montalto said.

Foreigners bought 991 million rand ($67 million) of South African stocks Wednesday. They also picked up 649 million rand of local bonds, the 14th day of net purchases, the most sustained period since May 2011.

Yields on rand-denominated government bonds due December 2026 fell 5 basis points to 8.76 percent as of 12:01 p.m. in Johannesburg, compared with 1.37 percent for 10-year U.S. Treasuries, 1.27 percent for similar-dated Italian debt and -0.18 percent for German bonds, data compiled by Bloomberg show.

“The worry we have is if yields in the U.S. increase, that will be quite painful for South Africa and all that money can flow out again,” Montalto said. “But, until that happens -- and there’s no driver for that yet -- it still should be very supportive of South Africa.”

Before it's here, it's on the Bloomberg Terminal.