Rand unlikely to help banks

• Good news is priced in and observers do not expect strong local unit to lift listed banking shares and retailers

Local banks and retailers on the JSE are not expected to benefit much from the stronger rand, with analysts on Friday saying commodities remained the preferred asset class for the year. The rand has firmed more than 5% against the dollar in 2017.

Local banks and retailers on the JSE are not expected to benefit much from the stronger rand, with analysts on Friday saying commodities remained the preferred asset class for the year.

This is despite the stronger rand traditionally benefiting banks and retailers because it reduces inflation.

“I do not see much rotational activity among the asset classes as commodities were still expected to outperform this year,” said BP Bernstein Stockbrokers portfolio manager Vasili Girasis.

Although the rand could still firm to R12.80/$ over the short term after hitting R12.90 last week, it was overvalued at current levels, said Girasis.

“The reward for risk taken on a 10c move in the rand may not be worth it,” he said.

Foreign investors seemingly do not foresee further rand strength in 2017 to boost the value of their local investments. Year-to-date outflows of bond and equity markets amount to about R20bn, with R18.6bn of those outflows from equities.

“Foreign sentiment remains fickle,” analysts at Nedbank Corporate and Investment Banking say. They expect foreign flows to remain volatile in 2017.

At the same time local investors do not fear further rand weakness, as only R363bn of the R2-trillion invested in unit trusts is in locally registered foreign portfolios.

The rand has firmed more than 5% against the dollar in 2017 after gaining 11.2% in 2016. This means that in 2016 an investor from the US could have received double-digit returns on the JSE on currency alone.

Rand hedges in the industrial sector have held up well so far in 2017, recovering from sharp retractions in 2016, with most of the outflows from banks and food and drug retailers. But rand hedges could expect earnings to eventually be negatively affected by the stronger currency move.

British American Tobacco has gained more than 3% after falling 10% in 2016. Richemont is up 8%. It fell 18.6% in 2016.

General retailers have regained 4.5% in 2017 after losing 11% in 2016.

Banks are feeling the heat, dropping 1.8% after gaining 27% in 2016. Standard Bank is expected to be the hardest hit by the prosecution based on collusion and price-fixing.

Standard closed 1.3% lower on Friday and is 3.56% down in 2017 after gaining 33% in 2016.

Apart from currency movements, real earnings ultimately influence share prices. General retailers, trading at a price:earnings of 16, and banks at 11.6, have a lot of the good news already priced in, with the fundamentals not looking that attractive.

Lower retail sales in December led to full 2016 growth amounting to 1.9% from 3.3% in 2015. Locally, the interest rate cycle may have peaked but lower rates to boost lending and banking earnings were not expected to materialise soon.

“The stronger rand has hurt the JSE, mainly on the randhedge side,” says Stanlib retail investment director Paul Hansen. “Resources have also taken a knock.”