Money flooding out of South Africa at a rapid pace
The Iran war sparked the biggest outflow in at least six years from South Africa’s bond market as foreign investors lost their appetite for one of the most popular emerging-market trades of recent months.
South Africa’s stock benchmark has also fallen 10% since its peak in late February, as investors pull back from overheated markets amid ongoing conflict in the Middle East.
Non-residents sold a net R41.3 billion ($2.45 billion) of government bonds last week, according to the latest JSE data tracking settled trades.
That’s the biggest weekly outflow on record since at least 2019, when Bloomberg started compiling the data.
It’s a sharp turnaround from the first two months of the year, when foreign investors were net buyers of R28.6 billion rand of the debt, according to National Treasury data.
Coming on the heels of large inflows in 2025, which had left positioning ripe for a selloff, according to Deutsche Bank.
“We recommend remaining cautious until more clarity on the geopolitical outlook materialises,” strategists, including Christian Wietoska, wrote in a note. The strategists last week shortened duration exposure to South African government bonds.
South Africa’s 10-year yield plunged by more than 300 basis points since April’s tariff turmoil to a record low in February as investors warmed to the coalition government’s economic program, including an improving fiscal outlook and planned reduction in debt issuance.
Foreign investors lifted their share of fixed-rate bond holdings to 32% at the end of February, from 30% a year earlier.
The rally took the bonds into “bubble territory,” according to Asad Bhatti, head of emerging markets at Invesco Asset Management.
That’s changing as hostilities in the Middle East send oil prices skyrocketing, raising concern that the South African Reserve Bank’s 3% inflation target will be tough to achieve, at least this year.
Since the outbreak of the conflict, the 10-year yield has soared more than 90 basis points, among the most in emerging markets. The yield dipped 13 basis points on Tuesday to 8.96%.
Some see a buying opportunity
In another sign of increasing nervousness, the cost of insuring the country’s debt against default over five years via credit-default swaps climbed to a five-month high.
“Given very heavy overweight positioning in SAGBs and many investors sitting on big profits, it made it very easy for investors to sell out of their positions,” said Bhatti, who cut his positions in 2048 securities last week.
“South Africa’s economy is also a net oil importer, which also placed it into the firing line.”
Some investors see the recent declines as a buying opportunity. A credible central bank, an inflation-targeting regime, as well as fiscal consolidation are among the reasons South Africa is viewed as a “positive re-rating” emerging market, according to Arif Joshi, a senior portfolio manager at Bramshill Investments.
Demand at the weekly government bond auction on Tuesday, though lower than last week, remained strong, with primary dealers placing orders for 3.5 times the amount of debt on offer.
“I’m going the other way, adding South African government bonds into this weakness,” Joshi said, adding that he expects the SARB to intervene in the market by buying bonds to shore up liquidity if the war drags on.
SARB spokesperson Thoraya Pandy said the central bank couldn’t comment as it is in a blackout period ahead of this month’s policy meeting. SARB Deputy Governor Fundi Tshazibana told Bloomberg News last week that the central bank is monitoring markets and stands ready to act if major dysfunction emerges.
But investors shouldn’t count on the central bank to rescue them, said Philip Fielding, a fund manager at Fidelity International in London. “It’s not in their nature to step into the bond market, and so far the flows are orderly.”
If the war rages for much longer and oil prices stay elevated, the central bank is likely to end its rate-cutting cycle. Markets have swung from pricing in two rate cuts by year-end to pricing a 25-basis-point increase, which will further drag on bonds.
“Investors are derisking in the wake of the Iran war, and South Africa is caught in that crossfire,” said Ruen Naidu, a portfolio manager at Ninety One. The FTSE/JSE Africa All Share Index also slid 1.5% to 115,252.20 last Friday.
If it closes below 115,610.13, that would mark a 10% slump from the last peak, meeting the definition of a market correction.
“The highly liquid South African markets often enable global investors to use local assets as early selling destinations in lieu of other EMs that may be more difficult to get out of,” said Herman van Papendorp, head of asset allocation at Momentum Investments.
“The higher oil price related to the Iran war feeds into worries about higher South African inflation.”
South African stocks had been one of the big winners of last year, jumping 38% in 2025 in a rally helped by a meteoric surge in gold prices and signs of cooler inflation.
However, with oil prices topping $100 a barrel and the war in the Middle East putting a chill on investor sentiment, investors have quickly unwound those bullish bets.
The losses now mean South African stocks rank among the worst-performing in the world, with a 15% drop on a US dollar basis since 27 February.
Reported with Bloomberg
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