Foreigners Desert South Africa's Stock Market Like Never Before

  • Outflows are on track to match last year’s record sales
  • Other developing country shares more attractive: Arqaam

A pedestrian passes the entrance to the Johannesburg Stock Exchange (JSE) in Sandton.

Photographer: Dean Hutton/Bloomberg

Amid robust demand for emerging-market equities, there’s one place global investors are avoiding: Africa’s biggest stock market.

With almost a full quarter to go, outflows from South Africa’s stock exchange have already reached 90.5 billion rand ($6.6 billion) this year, on track to equal last year’s record 125.8 billion rand. By comparison, net sales reached 56.6 billion rand in 2008, when emerging-market assets bore the brunt of a selloff sparked by the global financial crisis.

While the benchmark index is hovering near a record after climbing 11 percent this year, the stocks aren’t an attractive prospect for foreigners who have to factor in a weakening rand on top of anemic growth, rich valuations and political risks. The country emerged from a recession in the second quarter, the fiscal deficit is set to widen as revenue falls short of projections, and the ruling African National Congress is heading for a bruising leadership battle in December amid allegations of corruption and mismanagement.

Read more on the ANC’s succession race here.

“GDP growth is still very tepid at about half a percentage point, so vis-a-vis the other emerging markets it’s extremely disappointing,” said Jaap Meijer, head of equity research at Arqaam Capital Ltd. in Dubai. “Some of the other emerging markets are picking up and recovering and South Africa is actually not showing any momentum.”

South Africa relies on portfolio flows to finance its current-account deficit, which widened to 2.4 percent of GDP in the second quarter from 1.9 percent. Bond inflows of about 68 billion rand this year are not enough to offset the stock outflows. A widening shortfall would add pressure on the rand, which has already weakened 4.9 percent this half.

Read more on the prospects for South Africa’s volatile currency.

The South African selloff is occurring against the backdrop of strong demand for emerging-market assets, even as the Federal Reserve’s policy-tightening path draws capital to the dollar. So far this year, emerging-market equity funds tracked by EPFR received $55.5 billion of net inflows.

— With assistance by Sid Verma

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