The rand has become an unlikely winner among emerging market currencies since the COVID-19 pandemic swept the world, despite high levels of debt and unemployment in South Africa.
US sanctions have boomed in Russian bond markets, Turkish assets have been hit by monetary policy concerns, and other major developing countries such as India and Brazil have been hit hard by the coronavirus crisis.
“The rand traded very, very well, almost like a safe haven, in the high yield end of the index,” said James Lord, global head of FXEM strategy at Morgan Stanley.
The South African currency has strengthened 2.4% this year and has climbed around 30% in the past 12 months, while an emerging market currency index is down around 2% (.FXJPEMCS ).
And rand-denominated government bonds have produced handsome returns despite the sharp rise in yields on US Treasuries this year, which rocked other emerging markets. (.JGEGDCM)
South Africa offers some of the highest real yields of any major emerging market, with 10-year government bonds just over 9% with 3.2% year-on-year inflation (ZACPIY = ECI).
“Russia and Turkey obviously have huge domestic risks … and people are a bit reluctant to get too involved in these markets, which leaves South Africa as the default option if you want to invest in a large one. liquid market that has given way, ”added Lord.
Morgan Stanley calculations show South African bonds moved to an overweight of 1.8% – the largest on the index – at the end of March. Lord says this trend accelerated again in the first two weeks of April.
The commodity price hikes have bolstered South Africa’s record, said Manik Narain at UBS, who says metal-fueled export growth increased 20% year-over-year in February. This brought the country’s trade surplus to 6% of GDP, its highest level in more than three decades.
South Africa now appears to be a long way from its time among the so-called Fragile Five, a group of countries troubled by the taper tantrum of 2013 due to their reliance on foreign capital to fill funding gaps.
Meanwhile, stocks have given bonds a run for their money. The MSCI South Africa (.dMIZA00000PUS) is up 15% this year, in dollars one of the best performing in the emerging world.
But Africa’s most industrialized economy faces challenges, with the government trying to curb public sector wages to stop a rapid build-up of debt exacerbated by the pandemic.
And one of South Africa’s largest public sector unions is preparing for a strike over stalled pay talks. Read more
“Further progress on the public sector wage bill is essential,” Narain said, adding that budget arithmetic has raised more flags with trend growth of 5-6% below effective funding rates of 7.5. %.
And some analysts expect commodity price gains to slow or even decline in the second half of the year.
JPMorgan’s Sonja Keller predicts the economy could grow just 0.4% in the first quarter, and the rand could soften to 16 per dollar in the fourth quarter, from the current 14.32.
“They’ve handled the pandemic relatively well recently, which is great, but there is a budgetary implementation risk,” Morgan Stanley said, adding, “Can they meet their budget consolidation targets? “
Our Standards: The Thomson Reuters Trust Principles.