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Jury still out on foreign reaction to Ramaphosa win - strategist

Dec 19 2017 20:06
Carin Smith

Cape Town - It is still too early to gain a full understanding of how foreign investors are taking the election of Deputy President Cyril Ramaphosa as ANC president, John Cairns, currency strategist at RMB Currency said on Tuesday.

"Foreigners were net buyers of bonds (on Monday)... but the official election results only came after the bond market had closed," said Cairns.

Tinyiko Ngwenya, economist at Old Mutual Investment Group, describes foreign investors as very "agnostic". "They don’t really know much about SA politics - they will just be glad that Cyril won," she told Fin24 shortly after the election results were announced.

Under a Ramaphosa presidency, nationalisation and radical land redistribution would presumably be unlikely, according to Cairns.
 
However, he pointed out that questions are already being raised over whether Ramaphosa would be able to implement some of his policies - for instance a clampdown on corruption - because of divisions in the ANC power structures.

"Optimism was justifiably high yesterday, but a detailed look through press and expert political commentary shows there are some reservations about the election results - especially over the composition of the ANC Top 6," said Cairns. Three of the Top 6 are not considered allies of Ramaphosa.

Rand movements

Cairns thinks the rand could return to the R12.90s to the dollar on Tuesday - even R13/$.

"Volatility is likely to remain high even if the market price of expected volatility has dropped off sharply," he explained.

RMB analyst Michelle Wohlberg added that, after the rand weakened slightly overnight, one can expect cautious trading on Tuesday as investors realise "the good news has already been priced in".

"Expect liquidity to remain thin, with volatile price action throughout the course of the day. Bonds should continue to be supported as not only has the Ramaphosa win provided the much-needed boost that SA needed, but most emerging markets have strengthened as the search for yield offshore continues," said Wohlberg.

The election of Ramaphosa as new ANC president - and likely SA's next president - comes amid a crisis in confidence in both business and consumer sectors, according to Ngwenya.

Ngwenya expects markets to react positively to Ramaphosa’s election. She sees a stronger rand, a stronger domestic bond market and relatively positive returns from SA stocks.

"If the rand’s strength is sustained, it could lead to lower inflation and pave the way for interest rate cuts. However, before that is possible, markets and the SA Reserve Bank (SARB) will probably need to see evidence in budget 2018 that government is committed to achieving fiscal consolidation," she said.

Uncertainty remains

Although Ramaphosa's election could be an important turning point for South Africa, considerable uncertainty remains, cautioned John Orford, portfolio manager at Old Mutual Investment Group.

Not only will Ramaphosa not be president of the country until Jacob Zuma steps down or until the next general election in 2019, but the country's sovereign credit ratings could still be downgraded by Moody’s, triggering an outflow of capital from the bond market and putting pressure on the rand and bond yields.

Novare’s economic strategist Tumisho Grater said expectations are that under Ramaphosa's leadership, confidence may be restored in the investment community, especially if the focus is placed on the implementation of credible growth-enhancing policies as opposed to political infighting.
 
"The euphoria was swiftly tempered after the composition of the Top 6 was announced. While the rand had a spectacular run over the last few sessions - in anticipation of the leadership change - there are still risks to the local currency," said Grater.

"Further details on future policies and the ability to enact these policies, possible dollar strength and weak fundamentals could all cause the recent rally to fade."

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