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SA: perhaps the glass is in fact half full

Why is the rand so strong and what does the market ‘know’?

It seems almost trite to say that there’s not much positive to be gleaned from Monday’s news about rating agency S&P downgrading South Africa to junk status. But I’ll try and give it a go, nonetheless…

About six months ago, most commentators seemed to be in agreement that a downgrade would in fact be inevitable when the time came for a formal review by S&P (which had been scheduled for early December 2016). Reasons for this consensus view were plentiful and compelling, with the country’s political stability appearing to be tenuous, economic growth being measly (although, crucially, not negative), several State institutions finding themselves in rather perilous condition, etc.

I am no economist, and I certainly know a lot less about the intricacies of country ratings than most of these 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 than even the most brilliant analyst. Against this background, I was focusing simply on the rand – in my view, the single indicator which is usually the best barometer for what’s really going on in South Africa, as well as what the world thinks of the country and its prospects.

As readers will no doubt remember, the rand happened to be relatively strong throughout the second half of 2016: in fact, following the much-hyped Nenegate debacle of December 2015, the SA currency more than made back all the losses from that infamous incident. Looking at this from a distance, it therefore seemed pretty obvious to me: in aggregate, the market seemed to ‘know’ that a downgrade was in fact not going to happen – how else could one explain such relative currency strength?

Like any participant in financial markets, I’ve often been proven wrong, but for once I got the call right. We now know that S&P decided to “give South Africa a chance” and a downgrade never eventuated in December 2016. Cue celebrations and back-slapping all round; even President Jacob Zuma got in on the act as part of his most recent State of the Nation address, 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. On this particular occasion, a lot of the smart money was on former Eskom CEO Brian Molefe being parachuted into Pravin Gordhan’s hot seat, not very long after resigning from his post at the power utility.

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 (a level not seen for the better part of two years). With this in mind, I was once again sceptical of all the rumours: surely the currency market appeared to ‘know’ once more that such gossip was simply malicious, and Gordhan’s position was in fact secure?

We all know what happened next, however. The market was indeed wrong on this occasion: Gordhan is now not only the ex-minister of finance, but also one of the most outspoken critics of his former colleagues in government (if you have not yet watched his full half-hour address at last weekend’s Kathrada memorial, do so – it is one of the most compelling speeches you’ll ever witness).

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 that we were all shocked by this 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.

Whilst 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 16 months ago, when it dropped as much as 15% following the news, and ended up trading at levels touching 16.80 against the US dollar? What does the market ‘know’ this time which might not be obvious to all of us?

In 2004, James Surowiecki published his famous book, ‘The wisdom of crowds: Why the many are smarter than the few and how collective wisdom shapes business, economies, societies and nations’. In a nutshell, the book illustrates how the average ‘guess’ of a large number of market participants will typically be superior to that of the vast majority of those surveyed, regardless of individual expertise.

What this really postulates, is that markets are in fact relatively efficient – most of the time, in any event. Accordingly, it’s pretty easy to lose your shirt by being contrarian and taking on the whole market by simply ‘betting’ against it:. Yes, if you happen to be George Soros, and you manage to break the Bank of England when the UK withdraws from the Exchange Rate Mechanism, it could of course make you a billionaire overnight, but for every such success story, there are probably a thousand other contrarian speculators who got cleaned out in short order. You won’t find many books about the losers, however, so most of them are not very famous a few years later… such is the nature of survivorship bias.

Bringing this back to the rand, I will ask the question once again: why is the rand so strong on Tuesday (in relative terms at least), given the magnitude of last week’s political developments and this week’s rating agency announcements? What does the market ‘know’ that we are not yet able to see? 

Will Gordhan’s recent call for mass mobilisation end up being the catalyst for large-scale political upheaval? Will the National Executive Committee of the ANC bring the president to account, for once? Will Zuma and finance minister Malusi Gigaba survive? Or will we simply see the rand slip-sliding away from these levels (to paraphrase the famous song by Simon & Garfunkel)? 

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

Deon Gouws is CIO of Credo Wealth, London 


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Please see my predictions from November 2015 and then ask the questions again!

The strength of the Rand is probably because the fundamentals supporting the Rand and other emerging markets are relatively positive. Also because the population is not taking the firing of the FM and his deputy lying down.

If however, the current president is still in power after December 2018 and we have downgrades of Rand denominated debt by two of the three the rating agencies, things may look different.

For now the market is probably right. However, what do I know? I am a simple scientist. Humans are too complicated for me (including myself).

13.80 relative to the dollar is not strong, even if it was half of that it is not strong, it is pathetic it is disgrace.

Perhaps the markets “know” that Western economies are in far more trouble than ours – in spite of our crazy government?

Rand reaction to S.A. woes. Well written Deon. Maybe the current reaction of the Rand has more to do with the lack of economical real fundamental strength all over the world, than with the relative strength of the Rand as such?

Market levels all over are somewhat inflated relative to the real economical fundamental strength of such economies as reflected in the unusually high price earnings multiples. This is possibly a phenomenal created by too much available world money chasing colourful investment opportunities instead of being directly employed in the real economy to create real value and real growth, but then again, I might be proven wrong. Time will tell.

By Frans Viljoen, South Africa.

Very good article! I also believe/hope this was the necessary disaster that will lead to significant change and a turn arround SA’s were praying for.

Ironically our dear president will be the one that has iniated this change (unplanned).

One cant help asking the question who is really in control of South Africa’s destiny!

Personally I think the market is waiting, like I am, to see if there is sufficient political will of the people to change things.. or if we will be like Zimbabwe with voter apathy.

Personally I think the latter and so prepare to make my exodus while I can..(start the lengthy process to get visas etc) but we will see. I think what the rating agencies warn against is that a dominant party in SA can occupy parliament and protect a president from everything.. well they right.

Question is.. will people force the anc out or to rectify the situation? I have no hopes in this regard but secretly hope we have a civil strike & occupation of parliament, union buildings etc till things change.. but yah.. right now it looks like Zuma would just whatevs and bring in the army ushering in zim 2.0.. but yah.. I doubt people SA will go that far and that’s the problem with SA!!

If the educated and high skilled tax paying citizens stage a sit out, the economy will force change before the end of the 1st month..

Unfortunately in SA we always blame it on other voters.. corruption stops when voters demand it and based on the way people blissfully ignore road rules and pay off cops in Gauteng.. it tells me we can’t expect these people to ever expect more from gov.

Suggest you start getting your visas- but where you intend going beats me – all the favoured places have long ago put up their FULL signs to s Africans.

Yes and No.. If you have niche, specialized skills with engineering degree + mba + experience etc the doors are still wide open.. question is rather where to go.

NZ – Expensive version of SA albeit u on top end of brackets, basically a Cape Town scenario
AUS – Basically modern resource economy.. i.e. more of the same c**p with things hitting the fan presently in resource slump.
CAN – Extreme weather + mix of culture where you likely just wanna be in US
US – Zuma v2.0 – Trump .. meh
UK – Brexit woes coming, Terrorism
EU – Gamble, have to predict where the new capital for business will be and the way Brexit will go but terrorism and push back from growing right like UK & US = meh.

So all in all.. no place is worth it.

Ahh Mr Gouws or shld I say “allies sal regkom!” I think you need to brush up on your theories of market efficiency. They are NOT efficient – or as mr Buffett says – if markets were efficient I’d be a beggar with a tin cup. That is reality. A few weeks back I was being told that sa rand most under valued currency in the world. Well we’ll see

End of comments.





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