South Africa is a top choice for discerning emerging market investors

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Investor appetite for emerging markets has faded this year, but they still have a taste for South Africa. (Stock)

Investor appetite for emerging markets has faded this year, but they still have a taste for South Africa.

Rising US Treasury yields, inflation and the impending takeoff of Federal Reserve rate hikes provided reason enough to be wary of riskier assets. However, South Africa’s contained pricing pressures, attractive valuations and rising commodity prices thanks to China’s economic stimulus are among the factors that make it a favored bet.

“South African assets offer an attractive risk premium compared to other emerging markets,” said Mikhail Liluashvili, multi-asset strategist at Bank of America in London. “The rand is benefiting from monetary easing in China, which should push up prices for key South African exports.

Shares in the Johannesburg benchmark FTSE/JSE Africa All Share Index got off to a flying start, boosted by high commodity prices. The gauge hit a record high last week and has returned 7.5% in dollar terms this year, compared to a 1.1% decline for the MSCI Emerging Markets Index.

South African government bonds have already yielded 8.9% in dollar terms in 2022, the best performance out of 19 developing countries tracked by Bloomberg. The average for peers is negative 0.1%.

Even taking into account the Fed’s rate hikes, stocks still offer a large margin of safety against their peers, according to fund managers including Citigroup Inc. and Coronation Fund Managers, which hold bullish calls on debt. .

Money markets are pricing South African Reserve Bank hikes at 121 basis points this year, implying a 25 basis point increase at each of the Monetary Policy Committee meetings for 2022.

“South Africa rates and bonds offer attractive premiums as market prices in a very aggressive upside cycle and install a significant risk premium in the belly and long end of the swap and bond curves,” BofA’s Liluashvili said.

The South African rand is doing better than most emerging market currencies, even with its proxy status – meaning that in risky trading it can be subject to outsized swings.

Half of the 24 currencies of developing countries tracked by Bloomberg have recorded losses against the dollar since the start of the year. The rand was among those that strengthened, fourth overall with a return of 4.6%.

Part of the rand’s resilience is due to expectations of large inflows from a loan that South Africa entered into with the World Bank. These funds will likely create excess dollar liquidity in the local market.

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