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Still in South Africa, For Unexpected Reasons
The conditions for a great carry and fixed income trade are still in place: The economy is flat, local inflation pressures are falling, the external balance is improving, the rand is stable and domestic sovereign spreads have narrowed.
The reason, however, is rather different than we expected. Our initial assumptions were that (i) the government would not be able to rein in fiscal imbalances and thus that (ii) the central bank would be forced to act in a QE manner to bring down yields and funding costs. Fast forward to 2024, and it's exactly the opposite: in fact, the authorities have done a tremendous amount of fiscal austerity ... and SARB is running record-tight monetary policy. With no growth in the economy and plenty of room for further easing, we remain invested in both front-end ZAR carry and local sovereign bonds.
As before, this is still not an equity story. The South African index has done well this year off the back of firming export prices, but there's no underlying growth or real earnings momentum to speak of.
Still in South Africa, For Unexpected Reasons (PDF)
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