Reason for optimism: Further rand strength likely

Online since 31.08.2016 • Filed under Industry news • From Issue 4 - September 2016 - February 2017 page(s) 49-50
Reason for optimism: Further rand strength likely

Maarten Ackerman, Citadel Advisory Partner and Investment Strategist, unpacks the election impact for investors.

In a set of results that has delivered a very strong message to the ruling party, the 2016 local government elections saw the ANC’s worst showing ever in both national and municipal elections.

Although the party has still come in with a majority, at under 54% it is substantially below expectations of around 58% and puts it in the weakest position we have seen.

In addition, the ANC failed to secure a majority in five of the country’s eight metros, a significant loss that includes the economic powerhouse of Gauteng, the seat of parliament in Cape Town, and the hotly contested Nelson Mandela Bay. Quite clearly, people on the ground are unhappy with the status quo and have voted to show this. It has been suggested that this was more of an anti- Zuma vote than an anti-ANC vote, a demonstration of dissatisfaction with party leadership rather than with the party itself. However, we will need to wait and see how the ANC will react to this possibility. Cyril Ramaphosa has already made moves to allay fears and has indicated that the party will ‘do its own analysis of its performance, listen to the people and self-correct’. This business-friendly election result has been welcomed by the investment community with the rand reaching R13.67/$ on August 5, 2016. Let me put this into context: bumper US employment figures were published on August 5 revealing an additional 255 000 jobs and boosting the US dollar. In spite of this, the rand rose against the dollar and was also stronger against the cross rates.

A few green shoots

A strong rand should provide inflation relief, reducing the likelihood of further interest rate hikes this year. A further cut in the fuel price can be expected in September after the generous cut in August, which will provide the consumer with urgently needed relief while also boosting sentiment. While the South African economy is certainly weak, we can see that a few green shoots are beginning, which points to the possible bottoming of the current weak cycle. Since February, government finances have been improving and the fiscal deficit is moving in the right direction. Better mining and manufacturing figures have been posted and trade stats are also looking up. While this won’t propel us into a high-growth phase yet, the signs are certainly encouraging. Combine these factors with a business-friendly election result and the prospect of a sovereign credit rating downgrade in December starts to recede. The South African economy does remain fundamentally weak, and a downgrade at some stage remains on the table, but it is increasingly likely that we can stave this off in December. Different management in some of the municipalities, and far greater control in others where the ANC will be forced to enter into a coalition, is likely to find favour in the markets and we believe that there could be further rand strength for the balance of 2016.

A need to be nimble

Any rand strength will provide investors with an excellent opportunity to diversify offshore. On a valuation basis, foreign equities currently offer better value relative to local equities and a stronger rand will support an attractive entry point. Many foreign shares are trading at a discount to local counters and in many other global economies there are better growth prospects compared to South Africa. But investors will need to be nimble – we do not see this window being open forever as South Africa essentially requires a weaker currency to ensure global competitiveness. Cash should be used only to cover any short-term expenditure requirements, given that we envisage very modest or no interest rate hikes for the balance of 2016.

Local bonds should experience some price strength as yields drift lower after a favourable election outcome as foreigners regain trust. Also, unlike many first world economies, SA bonds are offering handsome real yields enhancing their attractiveness for foreign investors. Local bond investors should use this opportunity to lock in profits. With confidence up in the wake of the 2016 local government election results and the possible beginnings of a bottoming in the economic cycle, the rand can enjoy further support creating some exciting investment opportunities towards year end.

Issue 4 - September 2016 - February 2017

Issue 4 - September 2016 - February 2017

This article was featured on page 49-50 of SABI Magazine Issue 4 - September 2016 - February 2017 .

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