Hold on rates stumps market

The Reserve Bank’s surprise decision to keep rates on hold last week has put the JSE in a quandary about the road ahead, with a further bias to weakness in equities evident despite a firmer rand.

The unexpected decision to keep rates on hold last week has put the JSE in a quandary about the road ahead, with a further bias to weakness in equities evident despite a firmer rand.

A firmer rand usually supports banks and retailers and a weaker currency, the rand hedges. But neither may be benefiting from the Reserve Bank’s new holding stance after surprisingly cutting the repo rate from 7% to 6.75% in July.

Banks and general retailers rallied earlier last week ahead of the Bank’s expected decision to reduce interest rates by 25 basis points. The market was marginally weaker to flat in response, while industrials were lower as the rand hedges mulled the slightly firmer rand.

Analysts say there is increasingly less room for the Bank to cut rates, so an expected recovery in stocks that are sensitive to interest rates may be muted.

The Bank’s view on inflation does not give confidence that a firmer rand will result in lower inflation, which may have supported further rates cuts.

Consumer inflation is not expected to fall further from a low point of 4.6% in the first quarter of 2018, with the average in the next two years not dropping below 5%.

The top shares in the all share index are heavily biased towards a weaker rand as low GDP growth conditions and political uncertainty do not warrant extensive investment risk-taking from companies.

Presenting the monetary policy statement on Thursday, Bank governor Lesetja Kganyago singled out the 6.9% drop in private sector fixed investment as reflective of the low levels of business confidence

“A cut of 25 basis points would not spur an economic recovery,” said Novare analyst Tumisho Grater.

The focus needed to be on rebuilding confidence so the private sector was encouraged to spend through investment, she said.

Naspers, Richemont and Mondi have been the main drivers of all share growth in 2017, with the index up 10%. Shares with a local bias have faired worse, with Capitec being the exception, up 30% so far.

The Bank’s cautious stance is unlikely to give a boost to banks and retailers. But at the same time, the rand is not weakening enough to support rand hedges.

The low-growth environment presented an opportunity for investors to consider moving portions of their investments offshore, said FNB Share investing analyst Aneesa Razack.

“Gold remains an attractive option for investors as we see an outlook for a stronger dollar going forward,” she said.