CAPE TOWN – Up to and including last week Friday, the JSE has experienced 36 consecutive days of net buying of South African equities by foreigners. The streak, which stretches back to May 26, is the longest since at least 1999.
In June alone, the South African stock market saw record net inflows of R63.8 billion. This far surpassed the inflows in any previous month on the local market.
“The highest before this was the 22 days of trading ending April 16 2015, where equity inflows were R26.7 billion,” said Isaah Mhlanga, an economist at Rand Merchant Bank. “That is under a half of what we saw last month, which just illustrates the magnitude of what is happening in our equity markets.”
In the first 12 trading days in July, net foreign buying had already reached R27.9 billion. If the trend continues, this could potentially be another record month.
These inflows are even more remarkable given that for the first five months of the year foreigners were net sellers of South African equities. Outflows until the end of May were close to R30 billion.
Amelia Morgenrood from PSG Wealth said that this reversal has primarily been driven by international investors looking for yield.
“We are in a situation that we have never seen before in the world, which is that most other investment classes won’t give you any return in developed markets,” she said. “If you invest in German, Swiss or Japanese government bonds you have to pay in, and in the US and UK yields are extremely low.
“Not all investors are prepared to accept those kinds of returns,” Morgenrood explained. “They will rather take their chances with currency movements and invest in emerging markets where they can take out insurance and still earn a better return.”
She added that it’s not only South Africa that is experiencing this interest, but that emerging markets in Asia are also seeing record inflows.
The current situation is however even more unusual because in times of turmoil and political uncertainty investors usually stay away from emerging markets as they are considered more risky.
“This is just completely different to anything we have ever experienced,” Morgenrood said. “We have huge instability in the world and low economic growth, and usually investors would not even look at emerging markets in similar environments.”
Mhlanga added, however, that there are other compelling reasons why foreigners would be looking at particular South African stocks.
“The weak rand has increased the profitability of South African companies that derive a big proportion of their profits offshore,” he said. “Think of companies like Naspers, Bidcorp and MTN. If you add AngloGold to that list, which has benefited from a surge in the gold price, you start to see that the rand weakening had an impact.”
He added that these companies are also high dividend players, which makes them highly attractive to those who are chasing yield.
The fact that South Africa avoided a credit downgrade in early June could also be a reason for foreigners once again viewing the local market favourably.
“When all the ratings agencies did not downgrade SA, there was relief,” said Mhlanga. “That coupled with a general expectation of loose monetary policy in the run up to the Brexit vote brought the risk-on trade back into the market.”
These significant inflows have been a big contributor to the rand strengthening in the last few weeks. From R15.81 to the dollar at the end of May, the local currency is currently trading around R14.30.
This rapid improvement has however heightened the risk of a pull-back.
“Although we view the rand as hugely undervalued, this sort of recovery comes with risks of weakening once sentiment changes,” Mhlanga said.
Morgenrood added that if the inflows were to suddenly slow or stop the impact would also be felt in share prices.
“In the first five months of this year we experienced record outflows and we know what happened to the local market, particularly the big dip we had in January,” she said. “So if this situation is reversed it will definitely have an effect.
“However, I don’t think it is something that will change quickly because for investors to pull their money out of our market they will have to have somewhere else to put it,” she added. “From their perspective, I think they will still prefer to invest in local companies paying dividends of more than 3% than put it somewhere where they can’t earn any yield at all.”
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