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Investors looking beyond Zuma load up on SA debt

Foreigners have bought R25.6 billion of bonds in 2016.

Investors are disregarding political risks in South Africa as they line up to take advantage of the region’s best emerging-market bond rally.

Foreigners have bought R25.6 billion ($1.75 billion) of the nation’s bonds in 2016, the best start to a year since 2010 and a turnaround from the final quarter of 2015, when they dumped R1.5 billion of debt. Government securities denominated in local currency have returned 2.4% so far in April, the most among 16 developing nations in Europe, the Middle East and Africa, according to data compiled by Bloomberg. The year-to-date return of 14.67% is second only to Russia’s.

The flows are another sign investors are getting more confident about the nation’s outlook even as President Jacob Zuma, who is mired in a scandal over public spending on his private home, faces calls to step down and the prospect of a credit rating downgrade to junk increases. The government’s first dollar-bond sale in two years last week attracted bids for more than twice the $1.25 billion on offer, while automakers and tire manufacturers are among companies announcing new investments.

“People have looked at South Africa and said what else is there that we haven’t discounted that could be bad news?” said Nigel Rendell, an analyst at Medley Global Advisors in London who said it’s “probably a reasonable time to buy” the country’s assets. “A lot of people were underweight. People have probably said there’s not much else that can go wrong.”

Zuma Shock

Benchmark rand bonds and the currency have recovered to levels before Zuma shocked markets by dismissing Finance Minister Nhlanhla Nene on December 9. After losing 25% of its value against the dollar last year, the rand has strengthened 6% in 2016, helped by a record rally in emerging market currencies in March as commodity prices rebounded and investors pushed out expectations for higher US interest rates.

Yields on the new Eurobond bond due April 2026 have dropped 11 basis points since it started trading on April 8. South Africa’s creditworthiness has improved, with the cost of protecting five-year debt against default falling to the lowest since December 9.

Investors are less concerned that there may be specific risks attached to South Africa and more focused on buying into an improved outlook for commodities, Peter Rosenstreich, head of market strategy at Swissquote Bank, said from Gland in Switzerland. Commodities account for about half of South Africa’s exports.

“Short-term speculative money is less concerned with who is facing impeachment or who the next finance minster is, but rather wider sentiment on risk and commodity prices,” said Rosenstreich, who recommends buying the rand as a commodity-linked currency and because he expects its recovery from oversold levels to gain pace. The Bloomberg Commodity Index has climbed 11% from its record low on January 20.

South Africa’s currency traded stronger than 14.597 per dollar this week, its level before minister Nhlanhla Nene’s abrupt December firing propelled it to record lows, while yields on benchmark government bonds dipped below 9% for the first time this year. The rand was at 14.5116 to the dollar by 3:37pm in Johannesburg on Thursday.

“The currency has gone down so far, it’s clearly been oversold and it’s offering a decent return — and yields are pretty attractive,” said Medley Global’s Rendell. “That’s enticed people back.”

© 2016 Bloomberg


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