Surprise increase in foreigners buying South African bonds and equities

Foreign investors were net buyers of South African bonds and equities in April, with Iress data showing net inflows of R2.6 billion into equities and R1.4 billion into bonds. 

These numbers may be small in absolute terms. However, they are significant relative to the trend of foreigners selling off South African assets by the tens of billions. 

Over the last 12 months, foreigners have been, on average, R17 billion net sellers of equities per month and R19.7 billion net sellers of bonds per month. 

April’s numbers show this trend may be halted, at least temporarily. 

The data from April is even more significant in the context of the substantial selling of local assets by foreigners in the first three months of 2023. 

R170 billion of South African bonds and equities were sold by foreign investors across January, February, and March 2023. 

This sharp sell-off was driven by increased load-shedding, the greylisting of South Africa, and economic volatility globally. 

Why foreigners are buying South African assets

Daily Investor asked Schalk Louw, a portfolio manager and strategist at PSG Wealth, why foreigners increased their exposure to South Africa. 

Louw said global risk appetite grew in April, with investors looking to emerging markets for investment returns that beat inflation. 

This resulted in inflows to riskier assets, such as South African bonds and equities, which offer elevated returns with added risk. 

South African equities are also “in deep v“lue territory”, with lo”al companies undervalued relative to their global peers. 

This is exemplified by the average forward price-to-earnings (P/E) ratio of South African companies is well below that of their global counterparts. 

The average forward P/E for global equities is north of 16 times, while South African equities average a forward P/E of 9 times.

Louw is optimistic that the turn towards deep-value assets will continue and that South African equities are well-placed to take advantage of this shift in investment strategy. 

DFM Global CEO JC Louw pointed to the elevated yields offered by South African bonds and money market instruments as reasons for increased foreign investment into local assets. 

“It is too early to buy SA Inc. in general”, with South Africa’s deteriorating economic performance, poor infrastructure, and increased unemployment. 

And so, investors should look offshore for equity growth while capitalising on elevated yields on South African government bonds and money market instruments. 

Financial services companies, particularly banks, also offer high dividend yields, which may give investors a real return even without growth in value.

JC Louw joins Schalk Louw in saying South African equities’ future is gradually becoming brighter. 

“It is always darkest before dawn,” JC Louw said and if the government allows the private sector to step in and tackle issues such as load-shedding and logistics, local equities will grow significantly.