Record inflows ($9.2 bn) into SA bonds, prospects for the Rand and interest next year

Foreign inflows into South African Government bonds denominated in Rand were R61 billion (US$9.2 bn), up from R26.5bn in 2009, according to figures from the JSE Ltd. (, which runs the country’s securities exchanges. Net international investment inflows into equities were R35.6 bn, down from a record R75.4 bn.
A report on Bloomberg news says it is the first time that inflows into bonds have been more than those into equities since 1994, when apartheid ended in South Africa. It was more than the net cumulative bond purchases of the previous 15 years.
Yields are more than double those on US Treasury bonds. Bloomberg quotes Leon Myburgh, a fixed-income strategist for sub-Saharan Africa at Citigroup’s Johannesburg office: “South African bonds offer some of the highest yields around. Slowing inflation and declining interest rates made them a very attractive investment.”
It has been a year of massive inflows into emerging markets bonds and debt denominated in local currencies, driven as investors searched for higher returns when interest rates in developed nations have been near zero. According to Bloomberg data, “the spread, or yield difference, between 10-year South African bonds and U.S. debt of similar maturity was last at 480 basis points (4.8%), from almost 535 (5.35%) at the start of the year”. Put simply, bond prices in secondary trading increase when interest yields fall.
Bloomberg quotes Jacques Theron, portfolio manager at Absa Asset Management Private Clients, as saying the inflows could continue in 2011. Because the benchmark South African interest rate is at 5.5% (November’s cut was the 3rd in 2010 and the 9th since December 2008) and inflation is near its 5-year low (averaging 3.5% in the 5 months including November), investors may believe that the SA Reserve Bank (central bank) could be one of the few that could cut interest rates further in 2011.
Bloomberg says the combination of low inflation and falling interest rates meant that the bonds returned on average more than 26% in US dollars in 2010, 3rd-best performer after Colombia and Indonesia based on available index data from JPMorgan Chase & Co. Equity investments in South Africa’s FTSE/JSE Africa All Share Index returned more than 29% in 2010, measured in US dollars. Stocks were boosted by takeovers, including US Wal-Mart Stores Inc. acquriing a controlling stake in Massmart Holdings Ltd., and Nippon Telegraph & Telephone Corp. purchasing Dimension Data Plc.
Net foreign inflows into SA bonds helped the Rand (ZAR) gain 42% against the dollar, making it the best-performing emerging market currency, over the year.
Trevor Barsdorf, an analyst at Econometrix Treasury Management, is quoted as praising prudent debt management. Finance Minister Pravin Gordhan said on 27 Oct. that the country will keep its budget deficit to 5.3% of gross domestic product (GDP), down from a February estimate of 6.2%, and aims to reach 3.2% by fiscal 2014. Greece’s fiscal deficit was 15.4% of GDP and Ireland’s 14.4% in 2009.

Prospects for 2011
On the contrarian note, Bloomberg cites Manik Narain, emerging-markets strategist at UBS AG in London. “The best of the inflows into South African bonds is behind us.” Inflation has bottomed and will begin to pick up. and it is possible SA could raise interest rates by 50 basis points in 2011, causing foreign purchases of bonds to slow, cutting the currency to an estimated R7.60=USD1.00 by the end of 2011.
However, most remain optimistic. ETM’s Barsdorf says it will strengthen to R6.00=$1 over the year and it could climb as far as R5.50=$1. That would push inflation to below the SARB’s target lower limit of 3% and the bank could cut interest rates by 50 to 100 basis points during 2011.
Werner Gey van Pittius of Investec Asset Management told Bloomberg there could be another $4 billion of foreign inflows into South African bonds in 2011 just from dedicated local-currency emerging-market debt funds: “I can’t see too many reasons not to be bullish on South African bonds. We can’t see an aggressive sell-off on the horizon, unless there’s a massive risk-aversion event.”


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