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South Africa has long struggled with its reputation as a volatile and risky emerging market, but is now becoming a favourite among investors seeking to navigate a world with Donald Trump as the US president.
Goldman Sachs Group to Societe Generale SA say the country’s currency, stocks and bonds could outperform EM peers in 2025, protecting portfolios from global turbulence around inflation, trade and geopolitics.
They see the country as relatively sheltered from any shocks of Trump’s policies.
His pledges — from tariff hikes to spending plans and deportations — are already rattling money managers because of how they can bring back inflation, reduce the room for monetary easing and weigh on local growth.
EM currencies have all but erased their gains for the year and stocks are deepening an underperformance relative to richer nations.
Bond yields have risen since September as policy concerns outweighed the Federal Reserve’s two interest-rate cuts.
South Africa, however, stands apart. The nation is winning its fight against inflation, cutting price growth even below the low point of its targeted range.
The Reserve Bank has lowered benchmark borrowing costs twice this year, and has room for more. Bonds offer some of the highest returns in the world, even as the nation moves up the credit-rating scale.
Johannesburg stocks, despite rallying twice as fast as the broader EM benchmark this year, trade at a valuation discount.
“South Africa could be an attractive investment opportunity next year due to the idiosyncratic local story and simply the lack of alternatives in the EM world,” said Marek Drimal, a strategist at Societe Generale in London.
“The country offers a solid mix of elevated nominal and real rates, relative insulation from geopolitical tensions and somewhat less direct exposure to potential US trade tariffs.”
The country, which witnessed inflation of as high as 7,8 percent in the post-Covid period, has managed to cut it to 2,8 percent — becoming one of the biggest success stories in the emerging world over the past two years.
That also makes its bonds juicy to investors: The 10-year sovereign yield is still around 10 percent, meaning a real return exceeding 7 percentage points.
Benign inflation, and the Fed’s interest-rate cuts, have enabled policymakers to cut the policy interest rate by 50 basis points. But they remain cautious – offering traders the assurance that real rates will remain attractive in the near future.
Meanwhile, The rand has given investors the best carry returns this year among emerging-market currencies, except Argentina’s peso and Turkey’s lira.
While high yields and a stable currency have brought the biggest inflows since 2019 into local bonds, overseas ownership remains low because of outflows in the previous years.
Outsiders own just a quarter of the government debt, around the lowest level since 2011.
Turnaround story
“Foreigners have been disinvesting,” said Andrew Matheny, a Goldman Sachs economist, citing that as a factor driving inflows as a turnaround story takes shape.
After years of crippling electricity shortages, listless economic growth, political upheavals and the loss of its investment-grade rating, South Africa has embarked on economic reforms under a government of national unity.
“If they succeed in restoring fiscal credibility, execute their budget to plan, the growth picks up, they stabilise debt, then you can get a bull flattening of the yield curve as well as a further tightening of asset swap,” Matheny said. – Bloomberg
daniel chigunwe
