How One Poll Transformed South Africa’s Bond Market Fortunes

(Bloomberg) -- It took one influential opinion poll to ease anxiety among South African bond investors over the outcome of this month’s election.

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An April 26 Ipsos poll marked a turning point for investors fretting over the risk that the vote could lead to an unpredictable coalition government. Citigroup Inc. strategists are among those to turn positive, moving to an overweight on the debt.

South African local currency bonds trailed emerging markets for much of the first four months of 2024. But the debt has rallied to outperform all developing nations tracked by Bloomberg — bar Argentina — since the poll. Investors have enjoyed returns of 5.5% in dollar terms, against an average of 0.8% in that period.

“The election premium was felt in our bond market,” said Michelle Wohlberg, a fixed income analyst at Rand Merchant Bank in Johannesburg. “But now that the Ipsos poll is out of the way, we’ve seen foreigners dip their toes into South African government bonds again.”

Bloomberg Terminal clients can click on ELEC ZA for more on South Africa’s elections.

At the heart of investors’ concerns has been the prospect of a shift to the left in government policy. There has been speculation that the ANC, in power since 1994 but at risk of losing its parliamentary majority on May 29, could form an alliance with the more radical Economic Freedom Fighters or newly established Umkhonto WeSizwe party.

Sentiment has pivoted since late April, with non-residents turning net buyers of 3 billion rand ($163 million) worth of South African bonds that month, based on settled trades data reported by exchange operator JSE Ltd. They were net sellers in February and March.

Read more: South Africa’s ANC Support Slips; Leftist EFF Backing Slumps

Locals also increased their exposure to government paper last month, with holdings by banks and pension funds increasing to September highs, data from the National Treasury showed.

‘Flow Drought’

South Africa is in a good position to attract investors to its bond market after a long “flow drought,” Citi strategists Luis Costa and Bhumika Gupta said in a note to clients dated May 9.

“With the much-awaited Ipsos results largely showing unchanged support for ANC since February and MK mostly eating into EFF’s share of votes, the tail risk of a very market-unfriendly coalition has reduced,” the strategists said.

The election outcome “may not be as disastrous as previously thought,” the Citi strategists said, prompting them to hold an overweight position on South African government bonds.

The Citi team suggests a 0.5% cash overweight on South African government bonds, with an underweight position in Romanian government debt, due to increased supply and underperformance compared to other Central Europe peers.

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