Compelling valuations help make SA a buy among emerging markets

Investor appetite for emerging markets has waned this year, but investors still have a taste for SA.

Rising US treasury yields, inflation and the approaching lift-off for Federal Reserve rate hikes have provided reason enough to be cautious about riskier assets. However, SA’s contained price pressures, compelling valuations and the boost to commodity prices from Chinese economic stimulus are among factors making it a favoured bet.

“SA assets provide an attractive risk premium compared with other emerging markets,” said Mikhail Liluashvili, a cross-asset strategist at Bank of America in London. “The rand benefits from monetary easing in China, which should lift prices of key SA exports.”

Stocks on the JSE’s all share index have got off to a blazing start, spurred on by strong prices for commodities. The gauge set a record high last week and has returned 7.5% in dollar terms this year, compared with a 1.1% retreat for the MSCI emerging-markets index.

SA government bonds have already returned 8.9% in dollar terms in 2022, the best performer out of 19 developing nations tracked by Bloomberg. The average for peers is negative 0.1%. 

Even accounting for Fed rate hikes, the securities still offer a large margin of safety compared with peers, according to money managers including Citigroup and Coronation Fund Managers, which hold bullish calls on the debt.

Money markets are pricing in 121 basis points of Reserve Bank hikes this year, which implies a 25 basis point increase at each of the monetary policy committee (MPC) meetings for 2022.

“Both rates and bonds in SA offer attractive premiums as the market prices in a very aggressive hiking cycle and installs a significant risk premium into the belly and long end of swap and bond curves,” Liluashvili said.

SA’s rand is faring better than most emerging-market currencies, even with its status as a proxy — meaning that in risk-off trade, it can be subjected to outsize swings.

Half of the 24 developing-nation currencies tracked by Bloomberg have made losses against the dollar in the year to date. The rand is among those to have strengthened, fourth overall with a return of 4.6%.

Some of the rand’s resilience is down to expectations of large inflows from a loan SA has arranged with the World Bank. Those funds are likely to create a surplus of dollar liquidity in the local market.

Bloomberg News. More stories like this are available on bloomberg.com