Foreign flows set to switch to equities

16 January 2011 - 01:06 By TSHEPO MASHEGO
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Foreigners bought record amounts of government debt last year, with the total value of their purchases of rand-denominated bonds surpassing the combined value of the previous 15 years.

The JSE said net foreign purchases of government bonds surged to R61-billion, from R26.5-billion in 2009.

Offshore buying of local shares was relatively muted by comparison, with 2010's R35.6-billion down on the record R75.4-billion of 2009.

There is widespread agreement among market watchers that the trend will change this year, with equities dominating.

Recent data certainly backs up this prediction.

From January 3 to 13, cumulative net purchases of bonds and equities were R1.4-billion and R3.2-billion respectively.

It is unclear if the foreign buying trend can be sustained in 2011 and beyond.

Russell Loubser, CEO of the JSE, said: "It's still too early to tell if this trend in capital flows is sustainable; we must remember that the beginning of the year is traditionally an optimistic time of the year."

According to Loubser, the advantages of the JSE will become more evident as foreign investors become more discerning in the aftermath of the recession.

"It is not surprising that foreigners find our markets appealing. "We do around R11-billion or R12-billion worth of daily turnover on the JSE. Foreigners are looking at SA in a benign way. There is a lot that can and should be improved in SA, but there is also a lot that we're getting right," he said.

"In terms of inflows in 2011 on the JSE, I would expect that the commodity sector would be one of the key beneficiaries; it will be on the wish list of many foreigners. Another sector is the food and retail sector.

"It would not surprise if the Alsi [All Share index] pierces the previous record high."

This shift in emphasis from bonds to equities points to growing confidence in the robustness of growth in the local economy in 2011.

Whereas foreign investment in 2010 reflected foreigners' confidence in South Africa's macro-economic stability and the rand's ability to keep inflation down, the shift into equities reflects the realisation of the relatively limited upside in the bond market compared with equity markets in light of the robust global recovery under way.

The resource sector is a particular attraction for foreigners.

Nedbank economist Isaac Matshego said: "It would be interesting to see what foreigners are buying - in all likelihood they're buying resources. The resources counters have run significantly.

"This shift in emphasis is an asset allocation move. Foreigners are positioning themselves to benefit from the anticipated rise in commodity prices."

According to Absa Capital economist Gina Schoeman, other sectors are also in line to benefit from the switch out of bonds into equities.

"The obvious sector to attract capital is retail. Construction is well priced but activity usually lags consumer spending by at least nine months."

Other analysts cautioned that the seemingly relentless flow of foreign money into the country's markets could be fickle.

Adrian Saville, chief investment officer at Cannon Asset Managers, said: "I think these types of flows are somewhat cyclical and not structural in nature. If there is a shock event foreigners are not going to stick around in rand-denominated assets."

However, Saville agreed that if the current trend persisted and a global economic shock was avoided, the inflow of foreign money would push the JSE's All Share index to record highs.

He said: "If the wall of money turns to the equity market there will be a huge bull run."

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