Investors With Strong Nerves Reap Rewards as Rand's Carry Soars

(Bloomberg) -- For investors with strong stomachs, South Africa’s rand has provided ample reward over the past month, and there may be more to come.

The world’s most volatile currency leads carry returns among emerging-market peers, and by a wide margin: 8.3 percent, dwarfing the 2.7 percent return of the second-placed ruble. To earn those returns, however, investors would have had to deal with potential price swings at levels last seen during the 2008 global financial crisis.

Investors With Strong Nerves Reap Rewards as Rand's Carry Soars

The carry has come on the back of rand strength leading into the African National Congress’ leadership election this weekend, with traders betting Deputy President Cyril Ramaphosa, a millionaire businessman, will take the mantle from President Jacob Zuma. Should that happen, more rand gains could follow, boosting returns.

Even if Ramaphosa loses to Nkosazana Dlamini-Zuma, the president’s ex-wife and his favored candidate, the rand could benefit in the longer run as bond yields shoot up to levels where investors would find them hard to resist, according to Per Hammarlund, chief emerging-market strategist at SEB SE.

“I am optimistic about the carry of the rand,” Hammarlund said. “If the worst comes to worst and yields go to 11 percent to 12 percent, there will be plenty of rand buyers.”

A win for Ramaphosa could spark a rand rally to below 13 per dollar, a level last seen in September, according to Rand Merchant Bank. Victory for Dlamini-Zuma, a former chair of the African Union Commission, could see the currency test the record-weak level of 14.57 it posted last year.

The rand gained 1.5 percent to 13.3039 per dollar by 1:07 p.m. in Johannesburg. Yields on benchmark government bonds due December 2026 were little changed at 9.26 percent.

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