South African assets have posted strong gains this year, with the rand reaching its best level in more than two years, government bonds drawing solid demand and the JSE rallying across key sectors.
The gains have come as domestic economic fundamentals improve, commodity prices remain strong and global monetary policy remains supportive.
Bonds have performed particularly well, with the yield on 10-year blended government paper dropping from its peak of 11.11% in April to 8.46% on Thursday. The improvement signifies lower borrowing costs generally for a highly indebted government.
The rand reached a best level of R16.89/$ on Thursday, the strongest since March 2023, “supported by a slightly dovish US Federal Reserve, year-end carry flows, and increased market liquidity,” said James Turp, head of fixed income investment strategy at Sanlam Investments.
The Fed delivered a split decision to cut rates on Wednesday evening — the third interest rate cut this year, with predictions of one more in the pipeline.
“Fed chair Jerome Powell’s comments on a cooling US labour market were interpreted as dovish, supporting bond yields and the rand,” Turp said, adding that carry trade currencies typically strengthen over the year-end, as is the case with bonds.
The carry trade refers to investors who borrow in low interest rate environments to invest where returns are higher. The rand is an extremely popular carry-trade currency, given it can offer high yields, though that comes with significantly higher volatility and political risk.
Precious metals rally
A key driver of South Africa’s market gains this year has been the performance of precious metals. Gold and platinum have rallied strongly, lifting mining stocks and supporting broader equity gains.
“The biggest driver has actually been the attractiveness of precious metals,” said Sanlam Investments portfolio manager Roy Mutooni.
Read: DANI FREIDUS: Startling S&P vs JSE comparison shows data can be used to boost narratives
The metals rally has coincided with a broader return of investor confidence in the country that has boosted corporate earnings expectations, while the stronger rand and falling bond yields have encouraged flows into the equity and debt markets. Mutooni said the domestic improvements, combined with policy stability, have helped sustain market momentum.
Mutooni attributes the fall in bond yields to positive domestic developments, including the removal of South Africa from the Financial Action Task Force greylist, improved credit ratings, and the credibility of the medium-term budget policy statement.
Even amid political uncertainty, the combination of stronger growth, lower inflation, improving credit ratings, and infrastructure investment is contributing to a positive outlook for South African assets.
— Roy Mutooni, portfolio manager at Sanlam Investments
“When yields come down, market valuations go up, which has been positive for equities,” he said.
Economic indicators are also supporting the sentiment shift. GDP growth has picked up, inflation has moderated, and the Reserve Bank’s policy stance has reinforced expectations of a stable interest rate environment.
Lower inflation
Victor Mphaphuli, head of fixed income at Stanlib, believes those developments, together with ongoing structural reforms, signal credible fiscal management and a commitment to reducing government debt.
“Lower inflation expectations are helping reduce currency risk, which in turn encourages private sector investment,” he said.
Domestic investment activity is strengthening, which further helps local sentiment. Mutooni highlighted that state institutions such as Transnet are now able to borrow at market rates, and the government’s issuance of infrastructure bonds is helping to drive further investment.
“All of those factors contribute to positive momentum, even amid political friction with the US,” he said.
Mutooni expects the positive momentum to continue into the new year. “Politics will become more important with US midterms and domestic municipal elections, and governments are becoming highly indebted, so solutions are still being figured out,” Mutooni said. Low oil prices should help keep inflation and interest rates contained, supporting economic stability, he added.
“Even amid political uncertainty, the combination of stronger growth, lower inflation, improving credit ratings, and infrastructure investment is contributing to a positive outlook for South African assets.”
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.