Steer clear of South African stocks

Few emerging markets look less appealing to investors than South Africa right now.

Investors have fled from emerging markets in recent weeks, as the prospect of tighter US monetary policy makes risky assets seem less appealing. Particularly unappealing are the emerging markets with underlying weaknesses that investors were prepared to ignore in the good times such as South Africa. The local currency, the rand, has slid by a fifth against the US dollar this year.

South Africa is especially vulnerable as foreign capital flees emerging markets, due to its huge current-account deficit of 6.5% of GDP. This deficit has to be plugged with foreign money. Most of the shortfall is funded by short-term inflows, such as stock and bond investments, rather than direct investment into companies or infrastructure, which tends to be more long term.

Meanwhile, the economy's performance is uninspiring. GDP is set to grow by 2% this year, not nearly enough to make a dent in the official unemployment rate of 26%. Red tape is a headache for small businesses in particular and labour unrest is ongoing, with airport and construction workers recently demanding pay rises of more than double the official 6.3% inflation rate. To cap it all, says Shuli Ren in Barron's, the stock market looks pricey compared to other emerging markets. "Don't buy the beloved country."

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