Bottom Line:

  • Portfolio flows have significantly influenced the performance of the ZAR. The performance of bonds, in particular, appears to fit very closely with the performance of the ZAR, implying that one is a significant driver of the other. If one can therefore understand the investment prospects for bonds, one gains insight into at least one of the drivers of the ZAR and vice versa.

  • Both foreigners and locals have sought to diversify their portfolio assets away from SA. Locals have taken advantage of looser exchange controls to take a larger proportion of their funds abroad, while foreigners have steadily become an ever-shrinking holder of SA bonds relative to the total in issue. The conclusion is that there has been diversification away from SA as an investment destination, and much of that unfolded in the first few months of 2023.

  • However, with much of the bad news now priced in, investors will start to look at SA markets more cyclically, and the probability is high that the ZAR could recover, despite portfolio flows being overwhelmingly negative so far this year. Locals will feel the pain of having taken so much abroad at such unfavourable rates, and foreigners will enjoy the discounts on offer through a grossly undervalued ZAR and much higher interest rates.

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