South African bonds are the favored destination for foreign-investor cash as June draws to a close amid concern the economy is at risk of falling into its second recession in five years.
International investors bought the nation’s bonds for five straight days through June 25, while selling equities for six, the longest stretch of sales since January, according to the Johannesburg Stock Exchange. Even with the inflows, rand debt ranked only tenth in dollar terms among 16 emerging markets in the month, returning 0.8%, Bloomberg bond indexes show.
While stocks are losing favor, bonds may keep luring cash as the economy, which shrank 0.6% in the first quarter, risks contracting again in the next three months after the nation’s longest mining strike hurt output. A recovery in the rand since June 17 could boost bonds by easing concern that inflation will accelerate further beyond the top of the target range.
“We know the fundamentals aren’t moving in the right direction,” Morten Groth, who helps manage about $1.5 billion in debt at Jyske Bank A/S in Silkeborg, Denmark, said by phone on Thursday. “Risk aversion will definitely be an important factor when looking into South Africa because it will still have the tough fundamentals compared to some other countries in emerging markets.”
Inflows into the debt market continued for the fourth straight month in June, with investors adding R8.5 billion through June 25, according to stock exchange data. Foreigners sold a net R362 million of equities, snapping four months of inflows, the data show.
South Africa’s rand-denominated government bonds returned 2% this year, the worst performance among 16 emerging markets after Russia, Bulgaria and Latvia, according to Bloomberg bond indexes.
Global investors boosted their holdings in emerging-market bonds after the European Central Bank announced negative interest rates on June 5, with the Bloomberg EMEA Local Sovereign Bond Index heading for its fifth straight monthly increase.
“Some of this is driven by global trends: more bond flows, less stock flows,” Lars Christensen, an emerging-market strategist at Danske Bank A/S, said by phone from Copenhagen on Thursday. “Stock prices globally are probably a bit pricey.”
The 823-member MSCI Emerging Markets Index is trading at 13 times reported earnings, the highest level on a monthly basis since May 2013. South Africa’s benchmark FTSE/JSE Africa All- Share Index is selling at 19 times trailing profit, the most since December.
The rand rose 0.15% to 10.6154 per dollar by 15:53 in Johannesburg, extending gains to 2.2% since reaching its weakest level this month on June 17.
The rand’s recovery prompted investors to sell stocks in the gold mining and platinum industries, according to Ryan Wibberley, head of dealing for frontier and emerging markets at Investec Asset Management. The FTSE/JSE Africa Gold Mining Index climbed 7.4% this month while the platinum gauge contracted 1 percent.
“We’re six days on the trot of net selling,” he said on Thursday. “We’ve seen foreigners selling gold and platinum stocks. There is still a lot of concern about those industries.”
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