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South Africa\u2019s stock market is witnessing a paradox: foreign investors are selling in the local market but buying a US exchange-traded fund that invests in the shares at the fastest pace in 11 years.<\/p>\n
On the Johannesburg exchange, foreigners sold a net R14.6 billion ($1.1 billion) of shares in January with 19 of the 22 trading days seeing outflows, according to JSE Ltd.<\/p>\n
During the same period, investors in NYSE Arca poured $153 million into the iShares MSCI South Africa ETF, the biggest inflows since October 2007, according to data compiled by Bloomberg.<\/p>\n
This contradiction has many analysts stumped, but some hazard a guess about what\u2019s really happening:<\/p>\n
\u201cETF buyers tend to be retail investors and all emerging markets saw inflows in January from that investor base,\u201d said Julian Rimmer, a trader at Investec Bank Plc in London.<\/p>\n
\u201cLong-only institutional investors have probably been selling down owing to sluggish macro-economic conditions and the well-documented problems at Eskom.\u201d<\/p>\n
The performance of South African shares in US dollar terms may also be a reason. With the rand jumping 8.2% last month, the US ETF rallied 14% even as the local benchmark FTSE\/JSE Africa All Share Index managed only a 2.7% increase.<\/p>\n
In fact, the rand\u2019s gains have put South Africa at the vanguard of a revival in the carry trade. Investors who went long-rand in January locked in the best interest-rate arbitrage returns among emerging-market peers.<\/p>\n
The rally in the currency helped send the risk premium on the government\u2019s international bonds down by the most since April 2013.<\/p>\n
While investor sentiment on South Africa has taken a beating over the past year because of a moribund economy, policy missteps and President Cyril Ramaphosa\u2019s tenuous political control, there\u2019s at least one argument to back a bullish case for the nation\u2019s equities: valuation.<\/p>\n
Johannesburg stocks are the cheapest in more than two years relative to developing-nation peers based on estimated price-earnings ratios, a key attraction for value buyers when broader emerging markets are trading above their 10-year average valuations.<\/p>\n