Publications
Partners
Johannesburg - President Jacob Zuma is stumbling from one crisis to the next. Yet investors in the currency and bonds don’t seem to care as they chase the allure of emerging market assets.
The rand had its best month in seven years in March, and marked its first quarterly gain against the dollar since 2012. Benchmark South African bonds completed their strongest quarter since 2010 and stocks their best in a year.
Even the nation’s creditworthiness is climbing, with the cost of insuring the republic’s debt from default at the lowest this year.
Federal Reserve chair Janet Yellen set off the rally, expressing concern that global headwinds may restrain the US economy, reducing the prospects for higher interest rates. That spurred dollar weakness, gains in commodities and a switch to riskier assets that included South Africa, even as the country’s top court ruled on Thursday that Zuma had violated the constitution in the latest in a series of setbacks for the president.
READ: The five-minute-to-midnight judgment
“Investors really want to go long (on) emerging market assets,” said Guillaume Tresca, a currency strategist at Credit Agricole SA in Paris. “Valuations are low and they are waiting for a trigger to buy.”
The greenback has fallen against all its 31 major counterparts in March, with the biggest declines against the currencies of commodity-producing nations, such as South Africa. The Bloomberg Dollar Spot index, which tracks the currency against 10 major peers, dropped to the lowest level since June on Thursday.
The rand has strengthened almost 5% this week to be the best performer against the dollar, taking its monthly gain to 7.5% and halting 15 consecutive quarterly losses. South African stocks advanced 5.7% in March, their best month since October, with trading patterns suggesting further gains are in store for the local stock market and the currency.
Chief Justice Mogoeng Mogoeng said on Thursday that Zuma “failed to uphold, defend and respect the constitution and the supreme law of the republic” because he didn’t abide by Public Protector Thuli Madonsela’s 2014 findings that he should repay some of the R215.9m spent on his private home.
“From an investor point of view, it’s not the verdict but the fact that in South Africa we have democratic processes and we have a legal system that is functioning well and that holds people accountable for their actions,” said Andre Cilliers, trader and director at Treasuryone in Pretoria.
The Constitutional Court ruling is the freshest blow to Zuma since his decision in December to fire his respected finance minister Nhlanhla Nene sparked a sell-off in the rand and government bonds. Since then, senior officials from the ruling African National Congress have gone public with charges that the Guptas, a wealthy Indian family who are friends with the president and in business with his son, offered them cabinet posts in exchange for business concessions.
The controversies have undermined an administration already facing an economy that’s set to grow at the slowest pace since the 2009 recession and a possible credit-rating downgrade. Standard & Poor’s has a negative outlook on its BBB- rating, one level above junk. Moody’s Investors Service rates South Africa’s debt one level higher.
Ruling party
Benchmark local-currency government bonds are the best performers this week among emerging markets, returning 1.8%. Yields have dropped 68 basis points this quarter, the first quarterly decline in a year. While the rand gained as Mogoeng read his judgment on Zuma, investors betting on the president’s exit may be left disappointed because of the ANC’s dominance.
The judgment confirms “the existence of checks and balances in South Africa, with the Constitutional Court being able to rule against the president and the National Assembly,” said Roxana Hulea, an emerging markets strategist at Societe Generale SA in London. Hopes of Zuma leaving the presidency “are overdone and the process, if any, might take much longer”.
The rand’s 25% slump last year as the third-worst performer against the dollar among 31 leading currencies may have been overdone, said Cilliers at TreasuryOne. “It creates extremely good value for investors,” he said. “Only when we get to levels of 13.10, 13.20 could one actually start speaking of a rand that’s at fair value.” The rand was 0.2% stronger at R14.7418 by 08:40 in Johannesburg on Friday.
Even so, the gains in March haven’t removed the threats to Africa’s second-largest economy. The Reserve Bank has cut its growth forecast for this year to just 0.8% and inflation is running beyond its 3% to 6% target.
“I am less negative on South Africa than before, mainly because of the risk that Zuma might be forced out by the ANC leadership,” said Maarten-Jan Bakkum, who helps to oversee about $206bn as an equity strategist at NN Investment Partners in The Hague.
“That would cause a big rally. So being very underweight this market is dangerous.”
