The MSCI South Africa equity index gained 8,2% last week in US dollars, beating the MSCI emerging markets index (+3.4%) and the S&P 500 (flat). In rand terms, the JSE gained 3,6%, with resources up 4,1%, financials 2,2% and industrials 4,2%.
The rand on a trade-weighted basis gained as much as 5% by the weekend, while yields on rand-denominated government bonds declined both absolutely and relatively to US government bonds, so reducing the South African risk premium by about 22bps to 5,4% by the weekend.
The sovereign risk premium, represented by the yield gap between SA US dollar-denominated bonds and their rand equivalents, had also declined by about 30bps to 159bps over US Treasury Bonds by the weekend.
The market in high-yield US corporate bonds, a very good indicator of global risk tolerance, weakened modestly last week with the spreads widening buy about 20bps, leaving junk bond yields still well below their post-credit-crisis levels.
On the presumption that the Euro sovereign debt crisis will be resolved with appropriate ECB intervention, we would expect further improvements in the risks attached to emerging-market equity and debt over the next few months and so should not threaten the global recovery now under way.
Patrick Lawlor is with Investec Securities
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