Whilst the world and global investment community focuses (rightly so) on central and eastern europe’s growing conflict and humanitarian crisis, it is evident that discrete investment opportunities, far-removed from the region, are being missed.
South Africa, located 11 000km from the current maelstrom that is Ukraine has quietly emerged from a path of self-inflicted destruction. The Presidency, Judiciary and National Treasury are all seemingly on the same page, and navigating a more prosperous avenue.
Key domestic macro factors include:
South Africa’s inflation expectations seem well anchored around the mid-point of the Central Bank’s Target Range (3% to 6%) for now – though subject to escalating oil import impacts and further administered price challenges (Eskom debt recovery!);
The La Nina Oscillation has resulted in a 2nd year of rainfall bonus across the whole country, but importantly across the main grain-growing regions = bumper harvests = low food inflation;
South Africa’s Terms of Trade (foreign capital receipts) is at multi-decade highs – boosted by increasing commodity prices and a 5-year synchronised global growth recovery. A downside is government’s failure to improve transport and supply logistics (Rail & Ports) ~ SA has been unable to expand supply into the rising global demand environment, which has resulted in missed hard-currency inflows.
For the first time since the mid-80’s, SA has a Current Account surplus – yes, funded via $ receipts on commodity exports, but placing SA in a very favourable and improving fiscal position going forward, especially since the country has extremely limited hard-currency debt exposure.
Whilst Govt Debt/GDP exploded during the ‘Zuma-fication’ years, SA National Treasury has regained global respect and maintained a composed level of conservatism, boding well to contain and reel-in the debt ratio. This could be accelerated if global commodity prices remain elevated for longer – in particular those where SA is a global leader in terms of supply (Precious, Industrial and Strategic metals and minerals).
The SA 10-Year Sovereign Bond (ZAR-Local Currency) is trading at a 10+ year high, bouncing around a yield of 10%.
On a Real-Adjusted basis, SA’s 10-year (ZAR) bond yield is the highest amongst a global peer universe, many of whom have substantially worse domestic and global factors working against them. For example, most of South America is currently a political quagmire of uncertainty.
Given the above macro-factors and backdrop, I find it interesting that global fixed income managers, whether managing Global DM (for off-benchmark bets) or EM strategies, are not taking a more constructive position on SA-Sovereign (ZAR) issuance, or for that matter their Corporate equivalent. The latest Johannesburg Stock Exchange (JSE) Bond Foreign Trading on Bonds data does not illustrate the levels of support that should be forthcoming, given the current and near-term environment. A missed opportunity or what? Given the size of Global Bond market ~ across Specialist Bonds (DM & EM) and Multi-Asset strategies, it’s peculiar to see only a fraction over $1 billion in Net Settlements for the Year-to-Date.
USD equivalents (@ 15/1 ZAR/$ exchange rate): $1 003mn Net Settlements and -$3 220mn in Net Trading.