Johannesburg – The third round of quantitative easing (QE3) in America could see more investment flowing into South Africa, but then the violent strikes in the mining sector need rapid resolution.
Last week the JSE, in tandem with global markets, rose after the American Federal Reserve (the Fed) announced that it would continue to pump cash into the country’s economy until a reduction in the unemployment rate becomes evident.
In previous rounds of quantitative easing investors had a surfeit of money and South Africa and other emerging countries’ shares and currencies benefited.
At one point on Friday the JSE’s all-share index climbed to a new high of 36 585 points and it closed the week 2.25% up at 36 550.
The rand also strengthened following the Fed’s announcement and early on Friday evening was trading at R8.20 to the dollar.
Derry Pickford, a macro analyst at Ashburton in London, says QE3 will therefore probably be a plus point for South Africa. QE3 will keep yield rates in America and Europe down for longer and make investors look for alternative investments.
“The run on the South African stock market since September 5 coincided with the strikes in the mining sector.” The run began when investors really started to believe that QE3 would happen, he said.
Bloomberg reports that on Friday Minister of Finance Pravin Gordhan warned that continued strikes have an exceptionally deleterious effect on the country’s economy. Strikes knock confidence in South Africa, he said.
Investec economist Annabel Bishop says the rand has lost ground against both the euro and the British pound since violence broke out at Lonmin’s Marikana mine last month. But the rand has been trading sideways to the US currency because the dollar lost ground waiting for the QE3 announcement.
“There were also net sales of South African shares by foreigners because they increasingly shied away from risk in South Africa.”
Rand Merchant Bank analysts John Cairns and Josina Solomons say the most important issue for the rand is whether QE3 will keep the dollar under pressure for many months.
“Global factors may have been positive for the rand in September, but local conditions were all negative with strikes at mines and a widening current account deficit.”
Cairns and Solomons say the rand would probably have traded at R8 to the dollar on Friday had it not been for the strikes.
But Atlantic Asset Management portfolio manager Albert Botha says that a solitary issue, such as the current strikes, will not make change investor’s views on South Africa.
He says South Africa’s credit rating will probably come into question only if unrest and violence in the mining sector is protracted or escalates dramatically.
“It could happen if there is mounting evidence that things in the country are changing or if an enormous crisis arises.”
Absa Capital currency analyst Mike Keenan says there is about a 30% chance of the strikes spreading and becoming worse.
“One should however remember that the six-week strike at Impala Platinum in the first quarter depressed the gross domestic product about 1%.”
The Lonmin strike has lasted five weeks so far.
“The strikes will probably also affect South Africa’s current account deficit, which has deteriorated because of weaker global demand.”
Absa Capital economist Ilke van Zyl says trade flows and the current account deficit ultimately play a bigger role in the rand exchange rate than shocks such as a strike.
“In 2010 (with QE2) the rand strengthened to under R7 and generally remained there. That was despite many strikes at the time.”
Van Zyl says QE3 could also have a more lasting effect on investment flows to South Africa because it will continue for an indefinite period.
The Fed has said QE3 will continue indefinitely into the future. With previous rounds investors could calculate the effect on the stock markets, make money and get out, he says.
Dr Ben Bernanke, president van the Federal Reserve, at the news conference in Washington where he announced new incentives for the US economy.What is QE3?
On Thursday evening the American Federal Reserve (the Fed) announced that it would buy $40bn worth of mortgage-based securities every month until US unemployment starts to decline.
The Fed had already bought $2 300bn worth of government bonds and mortgage debt in the first two rounds of quantitative easing.
This time the central bank will however purchase only debt related to mortgage loans in an effort to boost the US housing market.
The Fed is hoping that through these securities it can lower the rates used to benchmark the home-loan interest rate.
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