Amid robust demand for emerging market equities, there’s one place global investors are avoiding: Africa’s biggest stock market.
With almost a full quarter to go, outflows from South Africa’s stock exchange have already reached R90.5bn this year, on track to equal last year’s record R125.8bn. By comparison, net sales reached R56.6bn in 2008, when emerging market assets bore the brunt of a selloff sparked by the global financial crisis.
While the benchmark index is hovering near a record after climbing 11% this year, the stocks aren’t an attractive prospect for foreigners who have to factor in a weakening rand on top of anaemic growth, rich valuations and political risks. The country emerged from a recession in the second quarter, the fiscal deficit is set to widen as revenue falls short of projections, and the ruling ANC is heading for a bruising leadership battle in December amid allegations of corruption and mismanagement.
“GDP growth is still very tepid at about half a percentage point, so vis-a-vis the other emerging markets it’s extremely disappointing,” said Jaap Meijer, head of equity research at Arqaam Capital in Dubai. “Some of the other emerging markets are picking up and recovering and South Africa is actually not showing any momentum.”
South Africa relies on portfolio flows to finance its current account deficit, which widened to 2.4% of GDP in the second quarter from 1.9%. Bond inflows of about R68bn this year are not enough to offset the stock outflows. A widening shortfall would add pressure on the rand, which has already weakened 4.9% this half.
The South African selloff is occurring against the backdrop of strong demand for emerging market assets, even as the Federal Reserve’s policy-tightening path draws capital to the dollar. So far this year, emerging market equity funds tracked by EPFR received US$55.5bn of net inflows. — Reported by Robert Brand and Neo Khanyile, with assistance from Sid Verma, (c) 2017 Bloomberg LP