Contrary to fears sparked by the recent junk downgrades and increasing political turbulence in South Africa, foreign investors have continued to pour money into the market – primarily through the purchasing of South African government bonds, according to analysts at Citibank.
The banking group reports that foreigners purchased more than R20 billion worth of South African government bonds since president Jacob Zuma ordered former finance minister Pravin Gordhan to return from an investor trip in late March.
R9.84 billion of this was invested as both Fitch and S&P Global issued junk ratings last week alone, the group noted, indicating that the investors were clearly confident of a strong rebound.
There is a consensus view that these political ructions are temporary, with an expectation that the global hunt for value in emerging markets will lead to a relatively quick snap back, said Citi analyst, Adriaan Du Toit.
However he was still skeptical about the bullishness of these investors and noted that the market was not likely to rebound as much as was hoped.
“We are a bit cautious about the idea that the ‘worst’ point has been reached, said Du Toit.
“First, because there seems to be momentum behind the negative ratings trajectory and we think that it is important to bear in mind that adverse ratings actions will trickle down to state owned corporations and that the downgrades could lead to jitters about mandate/index expulsions.”
“Second, because we do not think political power has shifted enough to justify outright bullishness.”
The optimism in the market is likely based on the fact that South Africa’s rand is expected to remain relatively stable against the dollar for the rest of 2017, as the impact of finance minister Pravin Gordhan’s shock dismissal and a credit rating cut to ‘junk’ was already priced in.
As a result, the rand is expected to weaken from a current R13.74 per dollar to R14.00 within the next 12 months, despite the expectation for the currency to firm to around R13.50 to the dollar within the coming six months.