Picture: REUTERS
Picture: REUTERS

London — A London-based hedge fund that has made gains every year since it was founded, through risky bets including Ukrainian GDP warrants and sanctioned Russian bonds, is now putting its money on SA.

ProMeritum Investment Management has allocated a fifth of its money — its biggest single holding — to SA government bonds, among the worst performers in emerging markets this year. It’s betting on a 15% rally in the next three to six months in response to the SA Reserve Bank’s aggressive policy easing and bond buying in the secondary market.

ProMeritum manages $320m, and handed investors a 9.6% return last year.

Pavel Mamai and Anton Zavyalov, who together founded ProMeritum in 2015, argue that the coronavirus-induced crisis is different from typical emerging-market crises, as the risk of depression is pushing central banks to prioritise growth, while accepting currency depreciation as an inevitable release valve.

Some emerging markets have not yet priced in the new reality, notably SA, where yields could tighten 150 basis points (bps) as bonds benefit from positive carry returns.

SA’s yield curve steepened to a record in May as investors piled into shorter end securities after the Reserve Bank cut its policy rate to a record low. In dollar terms, however, the bonds have been among the worst performers in emerging markets as the rand’s slide to a record low against the dollar in April eroded returns.

With inflation slowing and the economy set to contract as much as 6.1% this year, longer dated debt may rally in coming months, ProMeritum’s founders said.

“With the National Treasury funding in the short end of the curve, we see significant value in medium- to long-term government bonds, which trade at record steep levels,” Mamai and Zavyalov said in a note to clients.

The nation’s debt offers the highest yields in the developing world after Lebanon, Turkey and Nigeria, even after yields on the most-liquid 2026 securities fell to a five-year low. Investors lost about 25% this year in SA, the second-worst performance after Brazil, according to Bloomberg Barclays indices.

Moody’s Investors Service cut SA’s credit rating to junk in March, triggering the country’s exclusion from the FTSE world government bond index that is tracked by about $3-trillion of funds.

Yields on the 2026 securities climbed 10bps on Tuesday to 7.88%. The rand gained 0.2%, its first advance in three days against the dollar.