Investors with strong nerves reap rewards as rand's carry soars

Johannesburg - For investors with strong stomachs, the rand has provided ample reward over the past month, and there may be more to come.

The world’s most volatile currency leads carry returns among emerging-market peers, and by a wide margin: 8.3%, dwarfing the 2.7% return of the second-placed ruble. To earn those returns, however, investors would have had to deal with potential price swings at levels last seen during the 2008 global financial crisis.

The carry has come on the back of rand strength leading into the African National Congress’ leadership election this weekend, with traders betting Deputy President Cyril Ramaphosa, a millionaire businessman, will take the mantle from President Jacob Zuma. Should that happen, more rand gains could follow, boosting returns.

Even if Ramaphosa loses to Nkosazana Dlamini-Zuma, the president’s ex-wife and his favoured candidate, the rand could benefit in the longer run as bond yields shoot up to levels where investors would find them hard to resist, according to Per Hammarlund, chief emerging-market strategist at SEB SE.

“I am optimistic about the carry of the rand,” Hammarlund said. “If the worst comes to worst and yields go to 11% to 12%, there will be plenty of rand buyers.”

A win for Ramaphosa could spark a rand rally to below 13 per dollar, a level last seen in September, according to Rand Merchant Bank.

Victory for Dlamini-Zuma, a former chair of the African Union Commission, could see the currency test the record-weak level of 14.57 it posted last year.

The rand gained over 3% to R13.0938/$ by close of trade in New York.

Yields on benchmark government bonds due December 2026 were little changed at 9.26%.

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