SA glass is still half full

GLOOM PREDICTED: 99% OF THE TIME THE MARKET KNOWS BETTER

Why is the rand doing so much better than it did after Zuma fired Nene 16 months ago?

It seems almost trite to say there’s not much positive to be gleaned from Monday’s S&P downgrade of South Africa to junk status, but I’ll give

Why is there such relative strength in the circumstances?

it a go.

About six months ago, most commentators seemed in agreement that a downgrade was inevitable. Reasons were plentiful and compelling, with political stability tenuous, economic growth faltering (although, crucially, not negative), several state institutions battling etc.

Market knows best

I am no economist, and know less about country ratings than most esteemed commentators. But if there is one thing that I’ve learnt in my investment career, it is that 99% of the time, the market knows better.

So I simply focussed on the rand – in my view, the single indicator which is usually the best barometer for what’s really going on and what people think about it.

The rand rebounded throughout the second half of 2016, more than recovering losses from Nenegate, despite the pervasive, “impending downgrade” gloom.

It therefore seemed pretty obvious to me the market seemed to “know” a downgrade was not going to happen.

We now know S&P decided to “give South Africa a chance” and a downgrade never eventuated in December 2016. President Jacob Zuma got in on the act, claiming at least some of the credit for this fortuitous outcome.

But December’s good news was not yet cold, when rumours started circulating about the minister of finance (once again) being in the line of Zuma’s fire.

And yet the rand didn’t budge. On the contrary, it went on a tear, strengthening to 12.32 against the US dollar towards the end of March. The currency market appeared to “know” Gordhan’s position was in fact secure. The market was indeed wrong on this occasion: Gordhan is now the ex-minister of finance and one of the most outspoken critics of his former colleagues in government.

And then on Monday came the sudden announcement by S&P that South Africa is downgraded to junk status after all. It’s probably fair to say we were all shocked by the news, but not really surprised about it. What to make of the currency impact, however? At the time of writing, the rand was trading at 13.79 against the US dollar. This translates into a loss in value of some 2% since the news of the downgrade broke less than 24 hours ago, and it’s about 10% lower than a week before, when Pravin Gordhan was first recalled from his international roadshow.

Big question

While no one would paint such destruction in international purchasing power of the South African currency as good news, I will dare to ask the question: why is there such relative strength in the circumstances? Why is the rand trading so much better than it did after Zuma fired Nene?

I guess only time will tell. But in the meantime, I will continue to believe and hope that the glass is in fact half full.

Deon Gouws is CIO of Credo Wealth, London