As the rand continued its upward trajectory, closing the week at R17.97 firmer against the dollar, market watchers warned that the positive sentiment is still fragile and could be swayed by the announcement of the cabinet formed under the government of national unity (GNU).
The rand has been volatile in the past few months leading up to the elections due to investor uncertainty. However, this week it broke through the R18 barrier against the dollar for the first time in 10 months on news of the GNU formed by the ANC, DA, IFP and other smaller parties.
The JSE all share index, which had a strong week reaching more than 80,000 points on Tuesday, was buoyed by financial services and retailers. Standard Bank’s share price rose 5.58%, Capitec’s 5.36% and Nedbank’s 4.28%, while Shoprite’s stock rose 4.51%, with Pick n Pay adding 6.14% early in the week.
Nedbank economists in a note on Friday said that the currency’s direction will be determined by the composition of the national cabinet over the coming days.
Patrick Mathidi, head of equities at Aluwani Capital Partners, said the market sentiment is “very fragile” because while the GNU has got very promising signs of working, sentiment could be swayed by the composition of the economic cluster particularly. He said market watchers were also cognisant of how volatile coalitions in most of the major metros became.
“So it’s fragile in the sense that we still need to see how it will work in reality and the appointment of ministries within the economic cluster ... will be key in terms of how it plays out going forward. We also must not forget that we’ve seen how it (a coalition) has played out in the metros ... and hence, the sudden level of guarded optimism that the markets are looking at.”
President Cyril Ramaphosa is in consultation with partners in the GNU over how ministries will be shared among the parties that signed the agreement. It was not clear by Friday when he would announce his new cabinet.
If the markets get shocked because the new finance minister is an unknown entity, then we can very quickly retrace
— Makwe Masilela of Masilela Fund Managers
In a note published on Friday, FNB economists said despite its traditional volatility, “the rand has made strides that suggest that the political risk premium has subsided”.
FNB highlighted critical ministries in finance; public enterprises; trade, industry & competition; agriculture; land reform & rural development; and international relations & co-operation. It said the cabinet announcement would provide “further insight into the economic direction and priorities of the seventh administration under the proposed GNU. It will also offer a window into the measures taken to strengthen confidence in the state through the political heads of these various departments.”
While the previous administration made meaningful, yet incremental, progress in executing key reforms in energy, transport logistics, water, digital communications, and visas, “the seventh administration faces the significant task of not just accelerating reforms but doing it in a way that promotes sustainable and inclusive growth as well as job creation”.
Continuity in some ministries will also bode well for continuity in terms of reforms, which are much needed for economic growth, said Mathidi. “So, any minister appointments in that cluster, if they are seen to be credible pro-reforms, then hopefully we can fast track some of the initiatives currently in play.”
“I think there is the risk that (the positive momentum) could subside, as we are going through the honeymoon phase. And part of that risk playing out is indeed if some of the key ministries do not pursue the reform agenda that is currently in place. If we see new policies coming up, which are not pro-business, not pro-growth, then certainly, you know, we could then go back to the bad days...when foreigners don't look at us any more.”
There is speculation that finance minister Enoch Godongwana could retain his position. Sanlam’s head of fixed-income investment strategy, James Turp, said “any change will be a concern as he [Godongwana] has been doing a good job under difficult circumstances”.
Some commentators have said that the rand has been undervalued and this week’s performance could be the beginning of a correction.
South African assets tend to do asymmetric reactions to news. With bad news, market sell off aggressively, but when it comes to good news, they appreciate cautiously, said Turp.
“Now we’ve got the opposite, which is a potentially market-positive development that has quickly repriced, and it is unusual for South African markets to appreciate so quickly. It could go more, but equally in a couple of headlines about parties not seeing eye to eye, and this could derail quite quickly as well.
“So it’s not going to be easy from here. I would say it’s got the potential to improve and continue, but ... it’s going to be volatile, and it’s going to be sensitive...and any obstacles that present themselves the market is going to react.”
The rand tends to trade at fair value, either too expensive or too cheap, but it becomes very volatile. “But if you look at your traditional economic models and valuation tools, they all suggest that they’re relatively cheap, and we should trade somewhere around the R17.50 levels,” Mathidi said.
But to get there, will require tough decisions and hard work. “The heavy lifting has been done, the election outcome and acceptance and the GNU ... but to move us substantially more strongly from what we have currently, I think we need to see a lot more tangible evidence coming through.”
The weakening of the dollar could also boost the rand’s prospects.
The heavy lifting has been done, the election outcome and acceptance and the GNU ... but to move us substantially more strongly from what we have currently, I think we need to see a lot more tangible evidence coming through
— Patrick Mathidi, head of equities at Aluwani Capital Partners
Makwe Masilela of Masilela Fund Managers said market sentiment, both local and international, continues to be fragile.
Zwelakhe Mnguni, co-founder of Benguela Global Fund Managers, said the right cabinet appointments would be a good start for the rand to hold on to its gains and even improve further. "For a full correction we would need an added benefit of a US dollar weakness which is likely as the outlook for interest rates points to cuts. So 2024 could be a good year for SA financial assets and the Rand," he said.
On the equity side, the JSE all share index closed slightly flat on Friday.
Mathidi believes that the market is still very cheap. “So we need the momentum to continue. We need the foreigners to start buying into this new dawn and then as soon as we get that, then we should trade at valuations that are justifiable... But if let’s say, the markets get shocked because the new finance minister is an unknown entity and start hearing (disagreements) in policies being debated, then we can very quickly retrace and go back to where we were a few weeks ago.”
SA financial assets have been trading at big discounts relative to other emerging markets assets. The relief rally after elections was driven mostly by peaceful power transition and reappointment of President Ramaphosa. "The next marker for a sustained uplift in value would be cabinet appointments and then it would be down to reforms. Therefore I expect sideways movements until cabinet appointments and then we would likely see more upward movement," said Mnguni.
Turp said, overall, the country has been underperforming for too long for emerging market investors. But the darlings of the emerging markets such as Mexico and Brazil are also underperforming and their currencies are weakening and the rand is now stable and strengthening, and so are bonds and equities.
“It’s clearly indicating to the sort of emerging market portfolio managers that they’re missing something, so these aggressive moves, stronger than we’ve seen, are typical of foreign investors; they are not sensitive to price, they sort of hit the buy button. Unlike us who sit and look for basis points, they jump in, and that seems to be continuing. So will South African be the new darling? It certainly has potential.”
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