Money flooding into South African bonds

Foreign investors are pumping money into South African government bonds, with their ownership share of the asset crossing 30% for the first time in five years. 

Stanlib’s head of fixed-income investments, Victor Mphaphuli, revealed this, explaining how the asset manager is adapting to changing sentiment towards local assets. 

At Standard Bank Investment Solutions’ Democracy and Markets event, Mphaphuli said the election outcome was probably the best-case scenario for the asset manager. 

The Government of National Unity (GNU) provided the market with certainty regarding the ongoing reform process that has increased private sector participation in the economy. 

He explained that certainty regarding policy is the main thing investors, particularly bond investors, want. 

While also providing certainty, the GNU includes market-friendly political parties, giving the market confidence that broader reforms are possible. 

This has boosted the performance of South African assets, with bond values appreciating and the JSE All Share climbing. 

Since the end of the election, local government bonds have returned 7.6%. This is without investors receiving any interest payments, which would only improve their returns. 

To capitalise on this, Stanlib has increased its exposure to long-duration bonds, as the appreciation in value of these bonds is greater than that of their short-term counterparts. 

However, Mphaphuli cautioned that the entire investment landscape will change if South Africa’s new government delivers on its promises and growth picks up to 3%. 

This will boost local assets but may result in bonds losing favour as the yield on them declines due to improved government finances. 

This year is proving to be one of two halves, with the second six months dominated by questions around whether this positive momentum can be sustained. 

Mphaphuli went as far to say that yields on South African government bonds could hit single digits, if things go perfectly to plan. 

Last week, foreign investors bought the most bonds in a single day in over two years. According to JSE data, non-residents bought a net R4.6 billion. 

Mphaphuli said this has brought foreign ownership of local bonds to above 30% of the total issuance for the first time in years. 

The graph below shows the trend of outflows in the local bond and equity markets.

A new dawn 

There are still concerns that this may be another false dawn for South Africa, with hope snuffed out by government inaction and economic stagnation. 

This would be similar to the period of Ramaphoria following the election of Cyril Ramaphosa as ANC president in 2017 and eventually state president in 2018. 

Ramaphoria came to a swift end as market conditions soured and the ANC government remained strongly divided on key issues. 

Another reason was the depth of destruction during the Zuma era was much worse than most people initially realised.

Key institutions from SARS to the NPA were gutted, while SOEs were saddled with unsustainable debt and riddled with corruption. 

Cleaning up this mess took time and met considerable resistance, and unfortunately, there was collateral damage. 

For instance, the emphasis on improved maintenance at Eskom after 2018 meant that load-shedding was worse under Ramaphosa than under Zuma, hobbling the economy. 

As noted earlier, the 2024 New Dawn is different because key reforms are already underway. The new government just needs to keep its foot on the accelerator and not hit the brakes. 

But no one should be unrealistic. If everything were easy, it would have been done by now. There will be disagreements among GNU members along the way.  

When investments are cheap, people are tempted to wait until there is a clear catalyst that will unlock the value. 

In reality, the catalyst is usually unpredictable. This means that a valuation-based investment process requires persistence. 

Just when South African investors grew tired of hearing about being patient, we seemingly have a pro-growth GNU that was not the consensus view ahead of the election. 

This might be the catalyst to spark a long-term rally in South Africa’s capital markets.