‘Undervalued’ rand faces headwinds as ratings draw closer

THE RAND might look undervalued but headwinds – including political uncertainty, lack of confidence, low global growth, labour inflexibility and the country’s current account deficits, which remained high relative to most other emerging markets – were problematic, Peter Linley, the head of Old Mutual Equities, told journalists yesterday.

“We think we have seen the worst in the rand. We would be cautious about being bullish on the rand,” Linley said during a press conference to mark the 50th anniversary of the R15 billion Old Mutual Investors’ Fund.

The rand, which lost almost 4 percent to trade at R14.28 to the dollar last Tuesday after the National Prosecuting Authority charged Finance Minister Pravin Gordhan with fraud for extending the contract of former SA Revenue Services acting commissioner Ivan Pillay.

Analysts expect the currency to weaken to R17 to the dollar by year-end after South Africa’s credit rating is cut to junk.

Linley said while a downgrade would not be good news for the economy, the financial markets appeared to already have discounted the event in prices in a number of instances.

“The potential negative effects of a downgrade are making the market nervous and this, coupled with the current uncertainty, has resulted in some assets already pricing in the worst outcome,” Linley said.

“This provides opportunities for investors, provided a longer-term time frame is considered,” he said.

He said South Africa’s economic growth would probably remain a challenge in the short to medium term when taking into consideration the cocktail of problems facing the country.

The pressure on the current account, low global growth and volatile commodity prices, as well as the political instability, affected confidence among investors, Linley said.

“You cannot underplay the political confidence issue because it makes planning and investing difficult. Investors will invest if the environment is right and if there are incentives in place,” he said.

Linely’s comment comes as Volkswagen South Africa’s chairman and managing director, Thomas Schaefer, warned this week that South Africa could wave goodbye to the motor industry if the government insisted on enforcing revised empowerment codes.

Linley pointed to China, a large global growth driver, which has been shifting from an investment-led economy to a consumer-focussed economy.

“We have been cautious on Chinese growth for the last few years and are not yet convinced on the sustainability of the recent acceleration in economic activity. The… growth we saw in the first part of the decade was a once-off and will not be repeated. That was a boom time for commodity prices, which have now fallen to very low levels,” he said.

In another development, Gordhan yesterday told the trade union Uasa’s 6th fouryearly congress in Boksburg, Johannesburg, that the economy was showing green shoots, but these needed to be fed and watered at the right time.

Gordhan said the economy needed to change the structural features that held it back, and inclusive growth was necessary to decrease South Africa’s unemployment numbers.

He said as 5 million young South Africans needed jobs, no single role player could create the conditions for high inclusive growth on their own.

“Inclusive growth must cater for all, not just the rich. It must deliver on the expectations of the poor and help lift the despair about income inequality. Trade unions must help create a more constructive labour environment.

“Young people need exposure to the workplace, they need some training, to increase their employment prospects,” Gordhan said.

“Unions have a large role to play in modern day South Africa, but must modernise their strategy and move on from the ways of yesteryear. They are traditionally the defenders of the poor and the jobless. Unions must once again become part of the solution by changing the negative narrative about their organisations and help spread social justice.” – Dineo Faku