Election Poll Shifts Investor Sentiment, Sparking South African Bond Rally

Key Takeaway

• Citigroup Inc. strategists upgrade South African bonds to overweight after an Ipsos poll eases fears of a coalition government, sparking a bond rally.
• Foreign investors buy 3 billion rand in government bonds in April, reversing previous sell-offs and signaling renewed confidence.
• Citi's positive outlook based on stable ANC support and reduced coalition risks recommends a 0.5% cash overweight in South African bonds.

Election Poll Shifts Investor Sentiment

An April 26 Ipsos poll has significantly impacted investor sentiment towards South African bonds, calming fears over the potential formation of an unpredictable coalition government after the May elections. This shift in perspective was marked by Citigroup Inc. strategists moving to an overweight position on the debt, signaling increased confidence among investors. Prior to the poll, South African local currency bonds lagged behind their emerging market counterparts for the initial months of 2024. However, following the poll's release, these bonds have seen a remarkable rally, outperforming nearly all other developing nations tracked by Bloomberg, with the exception of Argentina. Investors have recorded returns of 5.5% in dollar terms since the poll, a stark contrast to the average return of 0.8% during the same period.

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

Renewed Interest in Bonds

The Ipsos poll's results have led to a notable shift in market dynamics, with non-residents turning net buyers of South African bonds, purchasing 3 billion rand ($163 million) worth of government bonds in April. This marks a reversal from the previous two months, where there was a net sell-off by foreign investors. Additionally, local investment in government bonds has increased, with banks and pension funds raising their exposure to levels not seen since September, as per data from the National Treasury.

Citi Strategists Turn Positive

Citi strategists Luis Costa and Bhumika Gupta have expressed optimism regarding South Africa's position to attract bond investors after a prolonged period of limited inflows, referring to it as a "flow drought." Their analysis, based on the Ipsos poll results, suggests that the African National Congress (ANC)'s unchanged support since February and the marginal impact on the Economic Freedom Fighters (EFF) by the newly established Umkhonto WeSizwe party reduces the risk of a market-unfriendly coalition. This assessment has led them to recommend a 0.5% cash overweight on South African government bonds, contrasting with an underweight position in Romanian government debt due to concerns over increased supply and relative underperformance.

Street Views

• Michelle Wohlberg, Rand Merchant Bank (Neutral on South African government bonds):

  "The election premium was felt in our bond market. But now that the Ipsos poll is out of the way, we’ve seen foreigners dip their toes into South African government bonds again."

• Luis Costa and Bhumika Gupta, Citi (Bullish on South African government bonds):

  "South Africa is in a good position to attract investors to its bond market after a long 'flow drought'... 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 election outcome may not be as disastrous as previously thought."