Ratings go sour but foreigners still sweet on SA, says Absa

DOWNGRADES of South Africa’s sovereign rating and Rand weakness may suggest foreigners have soured on the Rainbow Nation, but statistics tell a different story, according to Absa Asset Management Private Clients.

In an update on international investment flows to high net worth clients, the private client investment arm of the Absa Financial Services group paints a relatively positive picture.

Craig Pheiffer, General Manager Investments at Absa Asset Management Private Clients, says “a frequently traded currency and well developed financial market system make South Africa an attractive proposition for global investors”.

In an analysis of investment movements in the bond and equity markets over the last 15 years, he points out that 2012 saw record net inflows of R82 billion, well up on the previous year.

He notes: “After 2011’s substantial drop in net inflows (from R80,6 billion to R23 billion), 2012 saw a complete recovery.”

Pheiffer says from 1997 to 2012 net flows were only negative three times – in 2002, 2003 and “most dramatically 2008 when in the midst of the global financial crisis foreigners were net sellers of R54,4 billion of South African assets”.

South African bonds, rather than shares in JSE-listed companies, were the main attraction for foreigners last year. The equity market finished the year with a net outflow of R2,9 billion but this was a substantial improvement on 2011’s equity market net outflow of R16,4 billion.

Bonds put in a stellar performance, showing a net inflow R85,4 billion – a 117% increase on 2011’s net inflow of R39,4 billion.

Pheiffer adds: “South African bonds continued to be the preferred investment vehicle into South Africa as foreigners sought yield away from the very low interest rate environment of their homelands…”

“Confirmation in June 2012 by Citigroup that South African government bonds would be included in the US investment bank’s influential World Government Bond Index and its subsequent addition on 1 October, 2012, no doubt played a significant role in last year’s strong bond market performance.”

In the Absa Asset Management Private Clients view, there is no reason to suppose 2012 was a freak year for inflows.

Pheiffer notes: “In these times of European debt crisis, fiscal cliffs and civil unrest, the long track record of positive net flows into South Africa’s capital and equity markets is strong testimony of foreign investor confidence in South Africa’s financial markets.

“As long as world interest rates remain at subdued levels – which appear likely in at least the medium term – we can continue to expect inflows into the local bond market.

“After the recovery in equity market flows witnessed late last year, a continuation of the current trend will see us return to positive net flow territory for shares, an outcome last seen in 2010.”