Power Cuts no Bother as South African Stocks Attract `Hot’ Money

JOHANNESBURG (Capital Markets in Africa) – While daily rolling blackouts in South Africa are disrupting businesses and the lives of its people, the country’s stock market is powering ahead.

As of Tuesday’s close, Johannesburg’s benchmark stock index is heading for its best quarter since September 2013 and poised to advance for a fourth consecutive month, the first time that’s happened since May 2016. The 8.3 percent in gains this year has pushed stocks to their highest in six months.

Some investors are looking beyond the state power company’s struggle to keep the lights on in Africa’s most-industrialized economy to place a bet on the outcome of elections in May, said Julian Rimmer, a London-based trader at Investec Bank Plc. An opinion poll this week suggested the African National Congress of President Cyril Ramaphosa would dominate the vote, strengthening the hand of a leader welcomed by investors as a more-market friendly replacement to his predecessor Jacob Zuma.

“South Africa has been the recipient of some hot money flows, which had taken advantage of the rally in Brazil after its elections,” Rimmer said. “Some investors have considered the potential for South Africa’s elections to catalyze a rally here in the run-up to or aftermath of the May ballot.”

South African stocks are also getting a boost from investors who borrow dollars to buy higher-yielding assets in emerging markets, said Rimmer. “The rand offers a lucrative carry as global growth expectations have been adjusted modestly lower owing to trade wars, so interest rates have been lowered accordingly.”

There are strong signs that the foreigners betting on South African stocks are largely retail investors, rather than major institutions. Figures from exchange operator JSE Ltd. show that foreign institutional investors have been net sellerson all but one of the past 21 trading days. The benchmark index was 0.7 percent lower as of 3:33 p.m. Wednesday.

Valuations are also supporting the market, with Johannesburg’s benchmark stock gauge at the cheapest relative to the MSCI Emerging Markets Index since Bloomberg started tracking the data, based on estimated price-earnings ratios, a key attraction for value buyers. Rising appetite for risk-assets could also spur demand for the nation’s stocks, said Steve Brice, the Singapore-based chief investment strategist at Standard Chartered Plc.

“We see people are becoming a lot less worried about the outlook from an investment perspective, and deploying some more money into emerging-market assets,” Brice said. “Most emerging asset classes are under-owned, so people have less exposure than they should, but over time, we expect that to increase.”