Sell in Joburg, Buy in NYC: Foreigners’ South African Paradox

(Bloomberg) -- South Africa’s stock market is witnessing a paradox: foreign investors are selling in the local market but buying a U.S. exchange-traded fund that invests in the shares at the fastest pace in 11 years.

On the Johannesburg exchange, foreigners sold a net 14.6 billion rand ($1.1 billion) of shares in January with 19 of the 22 trading days seeing outflows, according to JSE Ltd. During the same period, investors in NYSE Arca poured $153 million into the iShares MSCI South Africa ETF, the biggest inflows since October 2007, according to data compiled by Bloomberg.

Sell in Joburg, Buy in NYC: Foreigners’ South African Paradox

This contradiction has many analysts stumped, but some hazard a guess about what’s really happening:

“ETF buyers tend to be retail investors and all emerging markets saw inflows in January from that investor base,” says Julian Rimmer, a trader at Investec Bank Plc in London. “Long-only institutional investors have probably been selling down owing to sluggish macro-economic conditions and the well-documented problems at Eskom.”

Sell in Joburg, Buy in NYC: Foreigners’ South African Paradox

The performance of South African shares in U.S. dollar terms may also be a reason. With the rand jumping 8.2 percent last month, the U.S. ETF rallied 14 percent even as the local benchmark FTSE/JSE Africa All Share Index managed only a 2.7 percent increase.

In fact, the rand’s gains have put South Africa at the vanguard of a revival in the carry trade. Investors who went long-rand in January locked in the best interest-rate arbitrage returns among emerging-market peers. The rally in the currency helped send the risk premium on the government’s international bonds down by the most since April 2013.

Sell in Joburg, Buy in NYC: Foreigners’ South African Paradox

While investor sentiment on South Africa has taken a beating over the past year because of a moribund economy, policy missteps and President Cyril Ramaphosa’s tenuous political control, there’s at least one argument to back a bullish case for the nation’s equities: valuation.

Johannesburg stocks are the cheapest in more than two years relative to developing-nation peers based on estimated price-earnings ratios, a key attraction for value buyers when broader emerging markets are trading above their 10-year average valuations.

Sell in Joburg, Buy in NYC: Foreigners’ South African Paradox

The divergence in foreign-investment flows continues in February: the Johannesburg market saw net outflows of $83 million in the first four trading days, while the U.S.-traded ETF gained net inflows of $11.3 million.

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