No end in sight yet to a tu­mul­tuous year

Financial Mail - Investors Monthly - - Contents - with Claire Bis­seker

As SA heads into the home stretch of 2018, the fi­nan­cial mar­kets are un­likely to get any respite from their re­cent tur­moil given the in­ter­est rate and po­lit­i­cal risks that loom in De­cem­ber.

As ever, the key fo­cus will be the in­ter­play be­tween the dol­lar and US in­ter­est rates.

The mar­kets are as­sign­ing an 80% prob­a­bil­ity to a 25 ba­sis point hike at the De­cem­ber 18-19 fed­eral open mar­ket com­mit­tee (FOMC) meet­ing, in line with the Fed­eral Re­serve’s con­sis­tent mes­sag­ing on the need to tighten pol­icy fur­ther in the face of ro­bust US growth.

Ma­trix Fund Man­agers econ­o­mist Car­men Nel says whether this will help or hin­der emerg­ing-mar­ket cur­ren­cies will de­pend on the dol­lar’s re­ac­tion to the FOMC state­ments as well as to any re­vi­sions to Fed mem­bers’ in­di­vid­ual in­ter­est rate fore­casts.

“There is lit­tle rea­son yet for the Fed to mean­ing­fully change its fore­casts, which means that risk as­sets such as the rand should ab­sorb the De­cem­ber hike rea­son­ably well,” she says.

Absa fixed in­come and cur­rency strate­gist Mike Keenan agrees that a hike is ex­pected so would come as lit­tle shock to the mar­kets or the rand.

The dol­lar is al­ready pric­ing in a lot of good US news. Part of this re­flects po­lit­i­cal and growth risks else­where.

“In the eu­ro­zone, the Chris­tian Demo­cratic Union will elect a re­place­ment for Ger­man Chan­cel­lor Angela Merkel, while Italy’s fis­cal and po­lit­i­cal sit­u­a­tion re­mains messy,” says Nel. “Once these is­sues are re­solved, and eu­ro­zone data starts sur­pris­ing to the up­side, the euro should re­cover.”

His­tor­i­cally, the odds favour a rand rally over De­cem­ber and into the new year. This year might be no ex­cep­tion given that the rand is slightly un­der­val­ued. If the dol­lar is peak­ing, the rand could end the year stronger, Nel be­lieves.

Absa thinks the rand is likely to re­main rel­a­tively range­bound dur­ing De­cem­ber, os­cil­lat­ing be­tween R14/$ and R15/$, de­spite two ma­jor event risks: the FOMC meet­ing and Fitch Rat­ings’ pend­ing coun­try re­view of SA.

Absa’s year-end point fore­cast re­mains R14.25/$.

Keenan ex­pects the rand to set­tle down in the com­ing weeks, un­less there is a sig­nif­i­cant bout of global risk aver­sion stem­ming from a fresh wave of trade ten­sion be­tween the US and China.

A key re­lease will be SA’s third-quar­ter GDP data, to be pub­lished by Stats SA on De­cem­ber 4.

The Reuters con­sen­sus is that growth will re­cover to 1.5% quar­ter on quar­ter in Q3 and 2.1% quar­ter on quar­ter in Q4.

If a rea­son­able re­bound ma­te­ri­alises, this should re­duce the risk pre­mium as­so­ci­ated with SA’s weak growth per­for­mance and en­tice re­newed cap­i­tal in­flows, which would sup­port the rand, says Nel.

But ul­ti­mately a strong rand rally will de­pend on the dol­lar, given un­cer­tainty around SA’s stance on land ex­pro­pri­a­tion and its com­mit­ment to struc­tural re­forms and fis­cal con­sol­i­da­tion, she says. These is­sues will prob­a­bly be re­solved only af­ter the 2019 elec­tions.

Fitch’s coun­try re­view is un­likely to have much bear­ing on the rand or SA’s growth re­cov­ery, given that Fitch has al­ready junked SA’s sov­er­eign rat­ing. In June, Fitch re­tained SA’s rat­ings on BB+, the top rung of the subin­vest­ment (junk) grade lad­der, and af­firmed the out­look as “sta­ble”. How­ever, it re­leased a rather omi­nous rat­ings up­date af­ter the medium-term budget in Oc­to­ber in which it ex­pressed scep­ti­cism that Pres­i­dent Cyril Ramaphosa’s growth-en­hanc­ing re­forms would sig­nif­i­cantly change SA’s growth tra­jec­tory.

Moody’s is the only one of the three main rat­ings agen­cies that still has SA rated in­vest­ment grade. Should Moody’s junk SA’s rat­ings at its next re­view in early in 2019, the coun­try’s gov­ern­ment bonds would be ejected from the world gov­ern­ment bond in­dex, which could pre­cip­i­tate more than R100bn in cap­i­tal out­flows.

This would ham­mer the rand and busi­ness and in­vestor con­fi­dence and cause a spike in SA’s bor­row­ing costs. But most econ­o­mists ex­pect Moody’s to re­main off the trig­ger at least un­til af­ter the elec­tions.

If growth re­cov­ers and the fis­cal po­si­tion im­proves, even slightly, SA should be able to stave off fur­ther down­grades.

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