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Stocks, bonds, rand... it’s awful, says asset manager as recession fuels downgrade fears

Sep 04 2018 15:48
Robert Brand and Colleen Goko, Bloomberg with Fin24

The rand extended the worst decline among emerging-market peers as data showed South Africa's economy had slipped into a recession for the first time since 2009. Stocks and bonds also fell.

The rand weakened more than 3% after data showed gross domestic product unexpectedly contracted in the second quarter, raising the nation’s risk profile at a time when emerging-market assets are under pressure from a rising dollar and global trade tensions. It also increases the chance of a credit downgrade by Moody’s Investors Service, which would plunge the country’s local-currency debt into junk status.

“Equities, bonds, rands... It’s awful,” said Abri du Plessis, a portfolio manager at Gryphon Asset Management in Cape Town. “I’m struggling to see any light. There is now a distinct possibility that there will be a downgrade by year-end and we won’t see the end of it for South Africa’s markets.”

The rand weakened to R15.34 to the US dollar, and by 15:34 it was trading down 3.06% at R15.31 in Johannesburg. The yields on benchmark 2026 government bonds climbed 18 basis points to 9.19%, the highest level since December.

The benchmark stock index fell 0.8%, spurred by a 2.9% slump in the banking gauge as lenders including Absa Group and FirstRand fell. General retailers tumbled 3.2%, led by declines in the Foschini Group and Truworths International.

Under pressure

“We’ve got financials and banks under quite a lot of pressure, also South African credit retailers leading the fall,” said Michele Santangelo, equity research director at Independent Securities. “On the industrial side, we see the more South African-economic-centric businesses also under pressure.”

The recession complicates the South African Reserve Bank’s policy path as the consumer inflation rate creeps toward the upper limit of its inflation target. Weak growth makes it more difficult to raise interest rates, leaving the rand even more vulnerable at a time when developing nations are tightening policy.

The central bank “faces a major dilemma of whether it should raise rates due to rising inflationary pressure from a weaker currency or refrain from doing so due to very weak economic activity,” said Piotr Matys, a London-based emerging-markets strategist at Rabobank. The contraction “keeps the bias firmly skewed” to rand weakness, he said.

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