Sunday Tribune

SA stocks lose appeal as rand rallies against dollar

- Michael Patterson and Janice Kew

THE RAND’S 29 percent rally against the dollar this year is eroding export earnings, slowing the economic recovery and making the nation’s equities the least attractive in emerging markets, according to Morgan Stanley.

“It’s becoming much more evident that the strong currency is going to have an impact on the real economy,” Michael Wang, a London-based strategist at Morgan Stanley, said. “That’s the clincher for us.”

The bank rates local shares the largest “underweigh­t” among emerging markets worldwide.

The rand’s advance, the second-biggest among developing nation currencies this year after Brazil’s real, reduced profits at mining companies such as AngloGold Ashanti and Impala Platinum Holdings, their chief executives said.

The stronger currency is also leading to job cuts at autopart exporters that cannot compete, according to Roger Pitot, the executive director of the National Associatio­n of Automotive Component and Allied Manufactur­ers in Johannesbu­rg.

The economy will expand 1.7 percent next year, lagging behind the 5.1 percent growth for developing nations as a group, according to the Internatio­nal Monetary Fund.

The 21 percent gain in the MSCI South Africa index this year trailed benchmark equity indexes in every major emerging market except Morocco. The South African index is trading at about 14 times analysts’ estimates for 2009 profits, compared with 16 times for the MSCI Emerging Markets index, which surged 70 percent this year, data show.

“It doesn’t look cheap enough yet,” said Wang, who advises money managers on emerging-market stock strategy with Jonathan Garner in London and Vinicius Silva in New York.

Consumer spending “is not going to be very strong next year, house prices still look like they have some downside risks and the other big thing is unemployme­nt,” he said.

South Africa’s 23.6 percent jobless rate is the highest among 62 countries.

Home prices slid an annual 0.3 percent last month, said mortgage lender Absa Group.

Retail sales sank a nearrecord 7 percent in August, according to government data.

The rand is rallying as investors are lured by higher yields available on local assets. The central bank held its benchmark interest rate at 7 percent on Thursday. Rates near zero in the US, Europe and Japan are spurring investors to enter carry trades, where they borrow in countries with low rates to invest in those with higher ones.

Investors bought a net R82.7 billion of South African stocks and bonds this year, data from the JSE show.

The 45-company MSCI South Africa index gained 0.9 percent on Thursday to 700.10 points and the rand fell 0.9 percent to R7.4787 per dollar after Sake24, a financial news service, reported the government planned to “freeze” the exchange rate. The government denied any such plans.

Brazil’s government has imposed a 2 percent tax on foreign purchases of fixedincom­e securities and stocks to dent the real’s 34 percent gain against the dollar this year.

The rand may weaken 2.6 percent to R7.68 by the end of this year and fall to R7.80 in the first quarter of 2010, according to a median of analysts’ estimates.

Morgan Stanley’s Londonbase­d currency strategist Gyula Pleschinge­r expects the rand to slip to R7.60 per dollar by year end.

By contrast, Absa predicts the rand will strengthen to between R6.95 and R7.05 per dollar by 2010.

The currency might appreciate to R6.80 per dollar by the second quarter of next year as a resurgence in risk appetite boosts purchases of South African assets, said George Glynos, the managing director of Econometri­x Treasury Management.

JPMorgan Chase’s Adrian Mowat upgraded his rating on South African stocks to neutral from underweigh­t last month, advising clients to buy shares of importers, such as Foschini, which might benefit from a strong rand. He says the South African market may “catch up” with shares in other developing nations as a rebound in the global economy boosts demand for riskier assets. – Bloomberg

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