South African markets on fire

South Africa’s financial markets are on fire. The stock benchmark rallied the most this year, the rand strengthened, and government bonds surged.

This suggests that investors are turning positive on the nation’s equities after the longest daily streak of outflows in three years.

Tuesday’s gains followed Cyril Ramaphosa’s re-election as president after the ANC agreed on a government alliance with the DA and smaller parties.

Shares also played catch-up with the global rally after a public holiday in South Africa on Monday.

Foreign investors were net sellers of South African shares for 25 straight days through Friday, according to JSE data.

The outflows deepened in the days following the May 29 election, in which the ANC lost its parliamentary majority for the first time since 1994.

It raised concerns it may partner with one or more populist rivals to stay in power. That pushed the benchmark down almost 4% from a May 20 year-to-date high.

Non-residents sold a net R42.6 billion of Johannesburg stocks in the 25-day period, bringing outflows this year to $4.7 billion.

However, on Tuesday, the FTSE/JSE Africa All Share index was the best performer among 92 global equity benchmarks tracked by Bloomberg.

The index rallied by as much as 3.5% as banks, insurers, and retailers surged. Old Mutual, Clicks Group, FirstRand, and Truworths were among the leading gainers.

The country’s so-called government of national unity has buoyed sentiment with a pledge to speed up reform measures.

The reforms include reining in state debt and tackling the power shortages and logistics snarl-ups that have hobbled Africa’s biggest economy.

The exclusion of parties supporting land expropriation and the nationalisation of mines and banks helped shape investor sentiment.

“This is the best-case scenario for South African politics — the DA’s active participation in a GNU — and South African stocks should rally further,” JPMorgan Securities David Aserkoff and Inga Galeni wrote in a note Tuesday.

They raised the country to overweight from underweight in their asset allocation for Central and Eastern Europe, Middle East and Africa.

Given the long run of foreign outflows from South Africa and the “big all-time low in the country’s institutional funds’ holding of domestic equities, we could see big flows into equities near term,” they wrote, adding that the upgrade is a short-term call.

S&P Global Ratings said the new government’s agenda “aims to prioritise structural reforms to address basic infrastructure and service delivery shortfalls and weak investments while gradually narrowing fiscal deficits.

“The election outcome is broadly favourable for the economic and fiscal outlook, compared with the alternatives,” it said in a statement.

The rand gained 1% to 18.0805 per dollar as of 2:44 p.m. in Johannesburg, wiping out its post-election losses.

Yields on benchmark 2035 government bonds plunged 26 basis points to 11.46%, the lowest on a closing basis since 2 February.

Demand rises at South Africa bond auction

Investor demand at South Africa’s weekly government bond sale rose, signalling improved sentiment.

Ramaphosa is due to be sworn in Wednesday, with investors’ focus turning to who he will appoint to his cabinet.

Primary dealers placed orders for R19.16 billion of debt, more than five times the 3.75 billion rand of securities on sale Tuesday.

According to central bank data compiled by Bloomberg, this compares with a ratio of 3.9 at the previous auction.

“Politically, we see the positive progress on forming a coalition agreement as a favourable market outcome, making local bonds more attractive,” said Hannah de Nobrega, an analyst at Prescient Investment Management.

She said the reduction of political risk in South Africa, coupled with prospects of interest-rate cuts in the US as inflation moderates there, should support demand for the debt.

Yields on South Africa’s rand notes maturing in 2035 fell 31 basis points by 3:40 p.m. in Johannesburg to 11.41%. That’s the most in a day since March 2022, taking total declines in June to 84 basis points.

South Africa’s local-currency bonds have been the best performing in emerging markets this month, handing investors a return of 6.4% in dollar terms.

That compares with the 0.02% average loss for peers in a Bloomberg EM Local Government Bond Index.