South Africa rand has plenty of gas in the tank

Financial Mirror (Cyprus) - - FRONT PAGE -

The South African Rand (ZAR) has been per­form­ing poorly in re­cent years, par­tic­u­larly dur­ing 2015 where it de­pre­ci­ated sharply against the USD. How­ever, the tide is turn­ing and the ZAR has ap­pre­ci­ated sharply over the past week. There are sev­eral rea­sons for the sud­den turn­around in the for­tunes of the cur­rency, namely a mega-deal be­tween SABMiller and AB InBev, weak US eco­nomic data, and the Fed’s de­ci­sion to main­tain in­ter­est rates at their cur­rent lev­els. How­ever, a myr­iad of other fac­tors need to be taken into con­sid­er­a­tion when ex­am­in­ing the per­for­mance of the ZAR. Over­all, BRICS coun­tries (Brazil, Rus­sia, In­dia, China and South Africa) have suf­fered since the China eq­ui­ties rout and its domino ef­fect on the global mar­kets.

Cur­rency de­pre­ci­a­tions for emerg­ing mar­ket economies have fea­tured across the board, with only the oc­ca­sional mini-rally be­ing ex­pe­ri­enced in re­cent times. In fact, the MSCI EM in­dex con­firms the sub-op­ti­mal per­for­mance of th­ese economies since the bear­ish turn­around com­menced to­wards the end of 2012. The an­nual per­for­mance in per­cent­age terms of MSCI emerg­ing mar­kets was -53.33% at the height of the global financial cri­sis in 2008, fol­lowed by a solid re­cov­ery to the tune of 78.51% a year later. EMs then flip-flopped be­tween 18.88% gains in 2010 and 18.42% losses in 2011. A re­ver­sal took place again in 2012 when the an­nual per­for­mance of EM economies in­creased by 18.22%.

The trend be­came ap­par­ent af­ter quan­ti­ta­tive eas­ing (QE poli­cies) by the Fed stopped, and it was then that con­trac­tions in an­nual per­for­mance be­came the norm. In 2013, MSCI emerg­ing mar­kets turned in a -2.60% con­trac­tion, and in 2014 the fig­ure was recorded at -2.19%. In 2015, it ap­pears as if the MSCI EM in­dex fig­ure will move back to­wards 2011 lev­els. For the year to date, the MSCI EM in­dex has posted re­turns of -15.4%. Not sur­pris­ingly, dur­ing Septem­ber, the re­turns have been less neg­a­tive ow­ing to dol­lar weak­ness, the Fed’s de­ci­sion not to raise in­ter­est rates above the 0.00% – 0.25% range, and the sub­se­quent ef­fect that has had on EM cur­ren­cies. Dur­ing the past three months from July-Septem­ber, the cu­mu­la­tive net re­turn is -17.90%

in emerg­ing mar­kets.

The sec­ond week of Oc­to­ber saw strong gains for EM cur­ren­cies, no­tably the ZAR. It comes as no sur­prise that the out­come of the Fed FOMC meet­ing on Septem­ber 16/17 was good news for EM cur­ren­cies, in­clud­ing the South African rand. The de­ci­sion by the Fed­eral Re­serve not to raise in­ter­est rates above the cur­rent 0.25% level has been a boon to de­vel­op­ing economies the world over. With i mmense pres­sure weigh­ing on the de­mand for min­ing, en­ergy and re­lated com­modi­ties from EM coun­tries, a strong dol­lar would be the death knell for th­ese economies. The like­li­hood of a Fed rate hike in 2015 has dropped be­low 30%, from over 41% a month ago. This means that cur­rency traders and spec­u­la­tors are go­ing long on EM cur­ren­cies like the ZAR. A short-term rally to De­cem­ber is likely to take place, with many mar­ket an­a­lysts al­ready call­ing for the rand to trade be­low the key 13:1 re­sis­tance level. The rand has al­ready been pushed down from over 14.07 to the USD in Septem­ber to its cur­rent rate of 13.09 to the green­back. This marks a dra­matic ap­pre­ci­a­tion of the cur­rency, and a strong re­ver­sal from the trend.

On Thurs­day, Oc­to­ber 15, US eco­nomic data was re­leased that cooled in­vestor sen­ti­ment. For starters, re­tail sales fig­ures did lit­tle to in­spire con­fi­dence in the ‘boom­ing’ econ­omy. Nei­ther did the jobs re­port. Typ­i­cally, bad news does not bode well for global mar­kets, but for emerg­ing mar­kets any neg­a­tives em­a­nat­ing from the US econ­omy tend to bring cur­ren­cies like the ZAR into favour. The rea­son­ing is sim­ple: a move away from the dol­lar is by def­i­ni­tion a move to­wards other economies such as the more volatile, higher risk EMs. Pre­cisely the op­po­site would hap­pen if the Fed were to raise in­ter­est rates in 2016: the dol­lar would ap­pre­ci­ate rel­a­tive to other cur­ren­cies and there would be an ac­cel­er­a­tion of cap­i­tal flight from coun­tries like South Africa which is con­sid­ered volatile to the rel­a­tively sta­ble US econ­omy.

Struc­turally, the South African econ­omy has prob­lems. Th­ese in­clude a power grid that is un­sta­ble and in the process of be­ing re­vamped, re­built and ex­panded with Rus­sian as­sis­tance. There are tremen­dous labour con­cerns in manufacturing and min­ing, with wide­spread strikes and wage dis­putes. Other is­sues in­clude cor­rup­tion, crime and the feel­ing that gov­ern­ment is en­croach­ing more onto the as­sets of the pri­vate sec­tor. How­ever, short-term the ZAR is gain­ing ground against the green­back.

The most sig­nif­i­cant short-term de­vel­op­ment for the ZAR is the cur­rent merger be­tween AB InBev and SABMiller. This deal is pegged to be the big­gest cor­po­rate merger in the his­tory of the world – val­ued at an incredible $106 bln. It dwarfs all other merg­ers that have taken place since 1988, in­clud­ing KKR & com­pany/RJR Nabisco, Heinz/Kraft Foods in 2015, Proc­ter & Gam­ble/Gil­lette in 2005, and InBev/An­heuser-Busch in 2008. Talks are still on­go­ing be­tween th­ese global ti­tans of the beer industry, but stake­hold­ers are said to be very in­ter­ested in pro­ceed­ings. If this comes to pass, it cer­tainly bodes well for the ZAR.

Spec­u­la­tors will be tak­ing bullish po­si­tions on the rand ahead of this deal, and it could eas­ily strengthen back to lev­els of be­tween 10 and 11 to USD if a Fed rate hike is kept at bay, Chi­nese im­port de­mand in­creases and com­modi­ties prices be­gin to sta­bilise at higher equi­lib­rium lev­els. Th­ese are all big ‘if’s and un­likely to come to pass, but stranger things have hap­pened.

Newspapers in English

Newspapers from Cyprus

© PressReader. All rights reserved.