23 Aug 2016 Is the honeymoon over for the Rand and the JSE?
The sacking of Finance Minister Nhlanhla Nene for no other reason than to get Treasury’s approval for a disastrous deal by SAA on 9/12 became our own 9/11 disaster. In the aftermath of the sacking, the Rand weakened to R16.85 and government bond yields shot up to 10.5% as mostly foreigners sold South African assets. A ratings downgrade to non-investment status loomed large, the consequences of which would force many foreign institutional investors to exit SA completely. While the Nenegate betrayal felt like a sudden ugly divorce for the Rand and JSE, the honeymoon that lasted from February this year until now has been surprisingly sweet.
Two days after 9/12, President Zuma was forced by his own “Top Six” to appoint a credible Minister of Finance in Pravin Gordhan. Slowly things started to look better and the heavily undervalued Rand started to recover more than most thought possible, from R16.85 in January 2016 to R13.25 as at 10 August 2016, strengthening by 27% during this period. (The correct way to calculate % change on the Rand is to use the inverse currency quote.)
Suddenly, ”they” said the Rand can strengthen to R12.80 or R12 or even to under R11. In many cases these were the voices of the same “they” that had predicted that the Rand will weaken to R20 against the USD in January 2016. Although Purchasing Power Parity (PPP) for the Rand is closer to R10 or so, it’s of little use in predicting the value of the Rand in the short or medium term of even 5 years. It’s better to disregard PPP when trying to forecast the Rand. The ratings reprieve in June got over-exaggerated into a false sense of security and the postponement of interest rate increases in the US caused a flood of yield-seeking investments into emerging markets – including South Africa. The JSE also recovered somewhat.
So why the negative sounding headline?
The first reason is that the extent of the pendulum swing when the Rand strengthened went a bit too far as it did when it weakened. In terms of economic fundamentals, very little has changed to support the levels of strength we are seeing currently. The GDP growth forecast actually worsened to 0% for 2016 after February 2016. Global growth forecasts have also worsened, leading to a negative impact on our exports, which in turn don’t help the Rand.
Secondly, the ratings reprieve in June is just that – a reprieve. If there is no substantial improvement in our economic growth, fiscal deficit and the other political factors mentioned by the ratings agencies, then we will be downgraded to non-investment status (junk status is still a long way off). And on the political side? Our Finance Minister has stood firm so far, but that may change soon, which leads me to my third point.
Today’s lead on the front page of Business Day reads: “Zuma to oversee parastatal strategy”. Business Day continues “President Jacob Zuma is to directly oversee the strategy of all state-owned companies and any government interventions that might be necessary, through the creation of a special presidential co-ordinating committee that he will chair, the Cabinet announced after its biannual lekgotla on Monday….. The decision to place Zuma at the apex of decision-making is noteworthy, as there has been significant tension within the government over state-owned companies, particularly between South African Airways (SAA) and Denel, and the Treasury.”
This move by the President has the potential to force the tension between him and the minister of Finance to breaking point. If he tries to force Treasury to provide funding to SAA for dubious projects, Gordhan will most likely resign or be replaced if he refuses. If that happens, and I am writing this because I think it can happen, the sweet honeymoon that we experienced since February will abruptly come to an end, with disastrous consequences for the JSE, Government Bonds and our currency.
Lastly, the technical indicators also suggest the Rand is overbought at this stage. The RSI and stochastics are pointing to a weakening of the Rand.
So, after a wonderful period of strengthening, the risk is to the currency and markets are more to the downside. For the reasons stated above, it might be prudent to consider moving investments overseas or buying true rand-hedges that operate or invest offshore, like the DBXUS ETF that can be bought on the JSE.
You can also visit iTradeGlobal, which is Sanlam iTRADE’S online platform that allows you to invest on twenty global stock exchanges.
– Gerhard Lampen.
Head – Sanlam iTrade Online