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'Emerging markets' are on the rebound but can South Africa leverage the momentum?

Natale Labia
By Natale Labia
29 Oct 2024
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As many South Africans can attest, this has not been an easy five years for 'emerging markets'.

Buffeted by the external shocks of the Covid-19 pandemic, soaring energy prices and the threat of a new Cold War, gross domestic product growth in most of the countries that fall into this catch-all bucket of mid-sized, mid-to-low-income economies has remained tepid at best. Might the tide, however, be beginning to turn?

Self-evidently, the expression of “emerging markets” is vague to the point of being meaningless. It is dubious to even pretend that whatever economic similarities might exist between economies as different as Mexico, Türkiye and Indonesia are worth delineating a sub-category or, worse, an asset class.

However, as with all such ambiguous financial categorisations, the very existence of the phrase and the fact that it is widely used imbues the meaningless with meaning.

Emerging markets, as a concept – and indeed asset class – are irrefutably and routinely used by those managing money in the financial centres of the world. Ironically therefore, the financial fortunes of such markets are determined, at least in part, by not so much anything inherent to the underlying economies, but simply what money managers might think the financial fortunes of a meaningless categorisation might or might not be.

These managers do see emerging markets as an asset class and one which, for the past five years at least, has not been one worth allocating that many assets towards.

This is for several reasons. Perhaps most importantly, high interest rates in the US and the Eurozone have simply meant that investors have not needed to take the implicit higher risks and volatility inherent to emerging markets to attain a reasonable return. Up to only six months ago, investors had been able to lend to the supposedly risk-free US government for only six months and attain a return of almost 5.40%.

Shifting tides


However, the fortunes of emerging markets might be about to change. First, and most obviously, these higher interest rates that sucked capital away from the periphery of the financial system, concentrating it in the developed world, are coming down. The major developed market central banks have all started cutting interest rates, and bond yields are moving down as a result. This means that once again, to attain a more compelling post-inflation return, investors are having to look beyond the US and Eurozone – dusting off those emerging markets decks from the zero interest rate days of the mid-2010s.

Second, the US economy (and that of Europe to a perhaps lesser extent) is not in poor health. Rates are being cut by central bankers not because there is an imminent recession, but rather because due to moderating inflation, they simply can. This is excellent for emerging markets because it is evidence of a global economy that is resilient enough to support the growth fortunes of the more vulnerable categorisation of economies (once again, whether this is true or not is not the point. The point that enough people who manage money think it is true gives it significance.)

Finally, there is China. In a last-ditch attempt to kickstart its long since stalled economy, Beijing has unleashed a wide-ranging set of stimulus measures, sending previously deeply unloved Chinese stocks soaring and potentially helping to support the nation’s demand for the resources that lots of emerging-market countries can supply.

Funds tracker EPFR said nearly $40-billion flowed into Chinese equity funds in the first week of October. 

“That influx of fresh money, which more than doubled the previous weekly record, also lifted the headline number for all EPFR-tracked emerging markets equity funds to a new record high,” said EFPR’s director of research, Cameron Brandt, adding that emerging-market debt funds were extending their longest streak of inflows in more than a year.

It goes without saying that this is all good news for South Africa. South Africa is, and should continue to be, a major beneficiary of these capital flows. Already Nedbank strategists show that after almost a decade of consistent net sales of South African debt and equities by foreign investors, they have finally turned positive into net purchases. However, with a total of almost R1-trillion having been disinvested from South Africa by foreigners over the past nine years, there is still some way to go to make up the difference.

Three caveats


Three caveats are worth remembering. First, these are financial flows. While net inflows will benefit those invested in South African financial assets, the direct effect on the real economy is negligible at best. A stronger currency and lower bond yields of course help, but with a lag. Furthermore, foreign “hot” capital flows can increase volatility, the enemy of long-term investment decisions.

Second, to that point – should the US economy start weakening, or if it looks like rates in the developed world will not be cut due to persistent inflation, then the emerging markets investment thesis could be torn up as quickly as it began.

Finally, while this is clearly an opportune moment for South Africa to get back on to the investor radar of institutional capital managers, it is just that.

Critical to getting investment of the long-term, foreign direct variety, which the economy so desperately needs, is tangible evidence that the new government is serious about structural reforms and making tough decisions to get the economy growing again.

Hopefully then the good performance in equities and debt will be the first step in attracting long-term investment back to the former “Rainbow Nation” investor darling of the 1990s.

South Africa cannot afford to let fleeting opportunities like this one go to waste. DM

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