Foreigners sell rand assets at record pace as Eskom woes mount
Foreigners are ditching SA assets at the fastest pace on record as concern mounts that the government will lose its last investment-grade rating.
Overseas investors have sold a net $4.8bn of SA equities and bonds in 2019, the most on a year-to-date basis in data going back to 1998, according to data compiled by Bloomberg.
Outflows, particularly from fixed-income securities, have accelerated since the start of June as ratings companies and banks turned more bearish about SA’s fiscal outlook.
The rand weakened 2.5% against the dollar last week, its worst performance since February, after Moody’s Investors Service warned that the government’s plan to double financial support for state power firm Eskom was “credit negative”. Moody’s is the only major ratings company that still grades SA debt higher than junk.
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Fitch Ratings followed on Friday by cutting its outlook for SA to negative. JPMorgan Chase & Co said the same day that a rally in the rand since the start of June was more to do with a supportive global environment than improvements in conditions locally.
“We now believe levels are stretched enough to enter outright rand shorts,” JPMorgan analysts including London-based Anezka Christovova and Robert Habib in New York said in a note. “SA’s fundamental picture remains very challenging with a ballooning fiscal deficit and structurally low growth.”
Despite the outflows, demand among local investors is helping to prop up SA assets. The country’s main stock index has risen almost 11% in dollar terms in 2019, compared with the MSCI emerging market index’s 8.2% gain. And while local bonds have sold off in the past week, they have still handed investors a dollar return of 7.4% in 2019.
Even with local investor support it did not seem the JSE was offering much value at the moment, and the local bourse was still likely to experience a correction after gains in 2019, said FNB portfolio manager Kabelo Tshola.
Domestic political uncertainty had played its role in aggressive selling by foreigners, while local headlines, such as those related to the battle between public protector Busisiwe Mkhwebane and President Cyril Ramaphosa, had often resulted in periods of low trading volumes on the JSE.
“Local politics is playing a role, the ratings issue is weighing heavily on investors’ minds,” Tshola said.
SA remained caught between two competing forces, that of a global environment favourable for risk taking, and local political uncertainty, said Cristian Maggio, head of emerging markets strategy at TD Securities.
The prospect of looser monetary policy from global central banks has boosted emerging markets in 2019, as investors have been hungry for yield.
There was still a very material risk that continued government support for Eskom and other state-owned enterprises, without a credible plan to turn around these firms, may cost SA its last investment grade credit rating, Maggio said.
“Clearly this latter factor has negative implications for the rand, all the rest being equal.” /With Karl Gernetzky