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Johannesburg - South African government bonds could soon lose some steam after a strong run propelled by portfolio flows from foreign accounts undeterred by strikes that have raised questions about the wisdom of investing in the country.
Investors are increasingly uneasy over often violent protests that have killed more than 50 people, including 34 striking miners shot dead by police in August.
The 'sugar rush' from inclusion in a major global bond index earlier this month, though now ebbing, has helped push portfolio flows to a net R82bn into bonds in the year to date, nearly double the R42bn of net purchases made during the whole of 2011.
By contrast, foreigners have spurned equities, continuing a trend from 2011 as risks from a weak domestic and global economic outlook offset the lure of high returns on the bourse.
"For a couple of years now you've had this massive off-loading into yield instruments, but out of growth assets. It's a pretty stark example in South Africa, but it's reflective across emerging markets asset classes," said Rudi Naumann, an analyst at Investec Asset Managers.
"I wouldn't bank on the same magnitude of flows to continue."
Foreign investors have pulled out of equities, off-loading a net R11bn worth since the start of the year, slightly less than the R16bn withdrawn over the same time last year.
For investors looking solely for yield, bonds remain a more compelling investment than stocks. The dividend yield on the benchmark Top-40 index is currently hovering at just under 3 percent, according to Thomson Reuters data.
It has steadily increased since hitting a multi-year trough of 1.77% in March 2010, but is still far below government debt, where the benchmark three-year and 14-year issues are yielding around 5.41% and 7.77% respectively.
This is despite strong demand ahead of South Africa's October 1 inclusion in Citigroup's influential World Government Bond index, that pushed yields lower.
"Despite the fact that equities have done reasonably well this year, it's certainly not been on the back of much foreign buying," Naumann told Reuters.
Strikes in the transport and mining sector have hit the shares of platinum and gold producers such as Lonmin, Anglo American Platinum, AngloGold Ashanti and Gold Fields as investors bail out.
Shift to bonds a global trend
The strikes which could slash growth in Africa's largest economy have unsurprisingly sent risk-averse investors scurrying to bonds, but the shift also reflects a global trend towards safe haven assets, analysts say.
Bonds were already in favour long before the initial violent protests at Lonmin's Marikana mine which left nearly 50 people dead, including 34 shot dead by police on Aug. 16.
"What's going on in the mining sector is potentially a bit more structural than simply a cyclical issue, but I don't think it has had that big an influence on asset allocation decisions which tend to be a more long-term phenomenon," said Leon Myburgh, sub-Saharan Africa strategist at Citi in Johannesburg.
The shift was because the growth outlook was still being revised lower globally, he said, adding that because inflation was relatively subded bonds retained their allure.
It is hard to quantify the rand value of local funds' holdings in bonds and equities, although the latter has traditionally enjoyed the largest share of the market.
But a survey by financial services group Alexander Forbes shows the trend is clearly tilting in favour of government debt.
At the end of June, local funds' investment in the South African share market was 61.4%, followed by cash at 20.1% and bonds at 17.1%. But bond holdings have jumped significantly from only 6.9% in 2008.
Local bonds, like emerging market peers, have the added draw of offering higher returns than those in developed markets where rates are near zero, but are increasingly looking overbought.
Both the Treasury and the central bank have warned the liquid nature of local markets means the huge portfolio flows that have helped cover a yawning current account gap of 6.4% of GDP can just as easily move out of the country.
