Foreign investors flee South Africa equities market on political risk, rich valuations, weakening currency

Amid robust demand for emerging-market equities, foreign portfolio investors are fleeing the South African stock market on weakening rand, tepid economic growth and political risks.

Bloomberg reports that while the benchmark index is hovering near a record after climbing 11 percent this year, the stocks aren’t an attractive prospect for foreigners who have to factor in a weakening rand on top of anemic growth, rich valuations and political risks.

“There’s one place global investors are avoiding: Africa’s biggest stock market,” the report noted, adding that with almost a full quarter to go, outflows from South Africa’s stock exchange have already reached 90.5 billion rand ($6.6 billion) this year, on track to equal last year’s record 125.8 billion rand.

By comparison, net sales reached 56.6 billion rand in 2008, when emerging-market assets bore the brunt of a selloff sparked by the global financial crisis.

South Africa just emerged from a recession in the second quarter and the fiscal deficit is set to widen as revenue falls short of projections. The economic situation is compounded as the ruling African National Congress 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,” Jaap Meijer, head of equity research at Arqaam Capital Ltd. in Dubai told Bloomberg.

“Some of the other emerging markets are picking up and recovering and South Africa is actually not showing any momentum,” Meijer further noted.

South Africa relies on portfolio flows to finance its current-account deficit, which widened to 2.4 percent of GDP in the second quarter from 1.9 percent. Bond inflows of about 68 billion rand 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 percent as at half year.

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 $55.5 billion of net inflows.