A London-based hedge fund that has made gains every year since it was founded, through risky bets including Ukrainian GDP warrants and sanctioned Russian bonds, is now putting its money on South Africa.
ProMeritum Investment Management LLP has allocated a fifth of its money — its biggest single holding — to South African government bonds, among the worst performers in emerging markets this year. It’s betting on a 15% rally in the next three to six months in response to the South African Reserve Bank’s aggressive policy easing and bond-buying in the secondary market. ProMeritum manages US$320M, and handed investors a 9.6% return last year.
Pavel Mamai and Anton Zavyalov, who together founded ProMeritum in 2015, argue that the coronavirus-induced crisis is different from typical emerging-market crises, as the risk of depression is pushing central banks to prioritize growth, while accepting currency depreciation as an inevitable release valve. Some emerging markets have not yet priced in the new reality, notably South Africa, where yields could tighten 150 basis points as bonds benefit from positive carry returns.
South Africa’s yield curve steepened to a record in May as investors piled into shorter-end securities after the central bank cut its policy rate to a record low. In dollar terms, however, the bonds have been among the worst performers in emerging markets as the rand’s slide to a record low against the dollar in April eroded returns. With inflation slowing and the economy set to contract as much as 6.1% this year, longer-dated debt may rally in coming months, ProMeritum’s founders said.
“With the National Treasury funding in the short end of the curve, we see significant value in medium to long term government bonds which trade at record steep levels,” Mamai and Zavyalov said in a note to clients.
The nation’s debt offers the highest yields in the developing world after Lebanon, Turkey and Nigeria, even after yields on the most-liquid 2026 securities fell to a five-year low. Investors lost about 25% this year in South Africa, the second-worst performance after Brazil, according to Bloomberg Barclays indexes.
Moody’s Investors Service cut South Africa’s credit rating to junk in March, triggering the country’s exclusion from the FTSE World Government Bond Index that is tracked by about US$3T of funds.