Rand likely to keep stepping up, says JP Morgan
US banking giant JP Morgan expects the rand to extend the gains that pushed it to 16-month highs as the country benefits from surging commodity prices that have boosted the foreign exchange earnings of mining companies.
That is sparking more interest in SA assets from foreign investors, who are also awaiting the implementation of structural reforms to boost the economy’s competitiveness, it said.
David Aserkoff, JP Morgan’s equity strategist for the Central and Eastern Europe, Middle East and Africa region, is recommending that investors adopt an overweight position in the rand, meaning that they should hold more assets denominated in the local currency than is suggested by their benchmarks.
“The currency’s relative strength has been boosted both by the commodity rally and better terms of trade, as well as tighter fiscal policy,” Aserkoff and a colleague wrote in a report published on Monday. The bank did not provide a forecast.
The rand is the second-best
performer among 31 currencies tracked by Bloomberg in 2021, advancing 4.5% against the dollar. It started the year at R14.70/$ and dipped under R14/$ for the first time since December 2019. It was trading at R14.0027 at 6pm, having earlier been as strong as R13.96, its best level since early January 2020.
London-based Aserkoff said in an interview that continued rand strength will support greater interest in the local market by foreign investors.
“I have received more interest from foreign investors in the last few months regarding SA than I have received in the last few years. The overall level is still lower than other emerging markets I cover, but this will continue to increase if there is implementation of structural reforms, faster economic growth and a stronger rand,” Aserkoff said.
Among the most likely to benefit from a reappraisal by investors are some of the country’s industrial companies and most of its banks.
JP Morgan suggests replacing Standard Bank with Absa in portfolios after a sell-off in the wake of the departure of former CEO Daniel Mminele last month made its shares cheaper relative to peers. “The sell-off around the management changes offered a little bit more upside,” said Aserkoff.
For the rand, it is a far cry from its plunge in the immediate wake of the country going into lockdown in March 2020, which saw it weaken to a record low of R19.34/$ in April 2020.
A strong rand is likely to keep a lid on import prices, enabling the Reserve Bank to continue supporting the economy with interest rates that are the lowest in about half a century.
JP Morgan is just one leading US firm that has expressed confidence in SA, with Bank of America and Goldman Sachs also voicing support for local assets. That was partly on the optimism that Joe Biden’s election as US president will not only boost the US economy but will benefit others with an approach that favours multilateralism.
While Donald Trump was president, the rand, together with other emerging-market currencies, was affected by a trade war with China that threatened to slow down economic growth and reduce demand for commodities.
Demand for higher-yielding assets has been boosted by speculation that the US will stick to easy monetary policy, even more so after a disappointing jobs report last week.
Local commentators have also turned positive on the currency, with Johann Els, chief economist at Old Mutual, saying on Monday that it could go to R13/$ in the short term, a level it has not reached since the middle of 2018. Economists at Nedbank said the currency is “fairly valued” and they expect it to “hold value” in 2021.
Declines in SA’s stocks during the second quarter of 2020 left them cheap compared with their peers, the banks said, even as they bemoaned the slow implementation of structural reforms.
JP Morgan estimates that the rally in commodity prices, including gold, platinum, palladium and rhodium, has significantly improved the country’s terms of trade, the ratio of export prices to import prices. This has changed the dynamics of the currency market by increasing the supply of dollars with which to purchase imports.
The US bank sees SA’s current account, the broadest measure of trade with other countries, moving into a “sharp” surplus of about 5% on a quarterly basis, compared with a consensus forecast of 3.7% for the first quarter.
Precious metals prices have surged in the year to date, with gains of 18% for platinum and 20% for palladium, while rhodium jumped 65%. That has led to bumper earnings for the country’s miners, translating into higher-than-forecast tax revenue. In 2020, that drove a recovery from record lows even as investors became net sellers of the country’s bonds.
A budget deficit that is lower than the government expects is likely to lead to a lower issuance of government bonds, giving support to SA bonds that are already offering the best yields among major economies.
At just more than 9%, the yield on the country s bonds due in 2030 compare’ favourably with 1.58% for treasury notes with a similar maturity.
JP Morgan economists have lowered their forecast budget deficit for this year from 9.7% to 8.7%.
JP Morgan also sees the suspension of ANC secretarygeneral Ace Magashule as positive because it could strengthen President Cyril Ramaphosa’s reform agenda and pave the way for faster structural reforms.