Foreign flows into local debt in emerging markets are surging, and South Africa is being left behind.

With some of the world’s biggest asset managers turning bullish on emerging markets, funds have flocked into the VanEck JP Morgan EM Local Currency Bond exchange-traded fund at the fastest pace in 11 months. The Bloomberg gauge for local-currency sovereign bonds in emerging markets rallied 3.63% in January, the best start to a year since 2012.

It’s the opposite trend in South Africa, where non-residents have turned cautious amid a power crisis that could cripple growth. January net inflows of $327 million mark the slowest start for local debt sales since at least 2019, when the Johannesburg Stock Exchange began reporting the data.

The flagging interest comes at a particularly challenging time for Africa’s most industrialised economy, which is becoming more dependent on foreign investment as its current-account balance turns to deficit after years of surplus. It’s also a significant missed opportunity, with Morgan Stanley Asset Management, a $1.3 trillion fund manager, declaring this month that the decade of emerging markets has begun.

“South Africa has lagged noticeably,” said Michelle Wohlberg, a fixed income analyst at Rand Merchant Bank. The sluggish performance in comparison to peers is because of the deteriorating growth outlook amid consistent electricity blackouts “which don’t seem to have any short-term end in sight,” she said.

Without those drags, South African bonds would have been looking more attractive. Inflation pressures are easing, yields are high and foreign positioning is light. But concern over power generation has spooked investors, Deutsche Bank analysts including Christian Wietsoka wrote in a note to clients.

State electricity company Eskom has cut power for 97 consecutive days since October 31. The government is looking into whether the energy crisis fulfils the legal requirements for a declaration of a national state of disaster – a measure last put in place in March 2020 to manage the Covid-19 pandemic.

“Once the Federal Reserve’s hiking cycle has peaked, we should see a greater allocation back into fixed income assets, and South Africa should be a beneficiary of this,” Wohlberg said from Johannesburg. “But we will lag our EM peers if we don’t address the load shedding urgently.”

Listen to Simon Brown and Laura Cooper from BlackRock on MoneywebNOW as they discuss the risks of recession on equity markets and the appeal of EMs over DMs.