February 22, 2019
Much Ado About Nothing
What we know
In January we mentioned that were a number of key risk events, both local and global, that should be firmly on the minds of investors and those looking to externalize funds.
Two of those events, namely SONA and the Budget Speech, are now behind us and in hindsight were, frankly, much ado about nothing. We did not (and cannot) predict what the content of these announcements will be and therefore believe it prudent to adopt a base-case that both events would be market-neutral.
Having said that, we also believed that little could be said that would be interpreted as massively positive, with negative announcements being more likely. As such we felt that caution, without panic, was the right approach to take.
Indeed, the ZAR price action over the past few weeks suggests that that was indeed the broader market view. Nevertheless, it is still useful to attempt to make an educated assumption as to what the market had priced in.
Our attempt at this last week suggested that “at least a part of the Rand’s losses has been due to emerging currencies as a whole selling off following their recent rally. It is the additional losses, around 2% over the past five days, that could therefore be considered more country-specific”.
We’re not going to rehash the details here and would rather point you to Alec Hogg’s summary of the Budget for the key points. However, for us, the bottom line is that this was never going to be a heel-clicking happy budget and that was correct. More importantly though, potentially disastrous announcements, in particular around Eskom, were absent. As such we believe the budget was indeed market-neutral.
So, how did the market react?
With all eyes on Wednesday, trading in the Rand since last Friday had been fairly uneventful as the ZAR remained firmly in a 14.00 – 14.20 range. As the speech started and the text of the statement was released, there was a knee-jerk weakening from 14.17 to 14.37; however, it was quickly apparent that this move had little momentum behind it and within 10 minutes we started gaining fighting back from the highs.
Indeed, by Thursday mid-day we touched 13.87 before then drifting back to 14.00. We therefore believe that, while no-one is suggesting we’re necessarily out of the woods yet – and Moody’s continues to circle – for now, the market has taken an as-you-were wait-and-see approach.
What others say
18 February 2019
Business Report – Budget 2019: Time For Us To Jumpstart SA
“South Africa risks looking like an ageing car broken down at the side of the road and badly in need of a jump-start if it’s to move forward. As we’ve all experienced at some point in our lives, what matters here isn’t that the car stutters along and maybe even stops. It’s that we use our ingenuity and dogged determination to get to our destination.
This is the attitude we need to harness now to get South Africa’s economy, job creation and social cohesion back on the road to greatness. It’s something that every business in every sector can help tackle in its own way – in a defiance of shaky consumer spending and unenthusiastic foreign direct investors.”
Reuters – World Stocks Lifted to 2½ Month Highs By Trade Optimism
“The optimism on trade has been strong, but the underlying economic data has been a lot of (sic) weaker – so you have some push and pull factors.”
19 February 2019
MoneyWeb – Funders Are Talking To SAA Again – Jarana (CEO)
“The airline hopes the progress it has made with its long-term plan to turn the struggling company around will be enough to convince lenders to extend the loans by four to five years.”
“Jarana pointed out that the turnaround strategy is based on certain assumptions, such as oil price and exchange rate expectations, adding that it is for SAA’s management team to navigate variances in this regard while executing the plan.”
Fin24 – Stocks Weaker As Investors Exercise Caution Ahead Of Trade Talks Resumption
“Investors struck a cautious tone ahead of the start of the next round of trade talks between China and the US on Wednesday.”
“Markets are also looking forward to the Fed’s FOMC meeting minutes slated for release on Wednesday for more information on the Fed’s dovish tone.”
20 February 2019
RMB Global Market – Tito’s Balancing Act
“Focus today will be mainly on the budget, and how SA responds to the big elephant in the room.
Should Treasury come up with a viable solution to Eskom that doesn’t break the balance sheet, we could see a 30bp-40bp rally, but if the market doesn’t like the outcome, there’s potential for SAGBs to start pricing in a potential Moody’s downgrade, and things could get messy.
So get ready to keep your hat on for what will be a very interesting day in the markets today.”
Biz News – Executive Summary Of 2019 Budget Speech
“The 2019 equivalent is aloe ferox – the spiky, bitter plant whose best attribute is its resilience. To emphasise the biblical theme of a lean year, Mboweni drew three times from the Old Testament, further illustrating the change since his October mini budget by switching to a different Dickens novel this year… from “best and worst of times” to “please, sir, may I have some more…”
21 February 2019
MoneyWeb – Wanted Equity Partners For Eskom Transmission
“The initial focus will be to establish an independent transmission entity and system operator that will provide open access to the grid to multiple generators of electricity”
“The separation of Eskom into three units will facilitate private sector investment and allow lenders to assess and price funding in accordance with the risk associated with the relevant borrower.
In other words, the transmission and distribution units will be isolated from the problems at generation.”
Business Day – Moody’s Says Budget Shows Further Erosion Of Fiscal Strength
“…Revenue under-performance lead to a renewed upward revision in fiscal deficits and debt levels, while contingent liability risks persist.”
22 February 2019
Daily FX – Gold Prices May Fall as Risk Aversion, Fed Rethink Buoy US Dollar
“On balance, a broadly risk-off lean probably spells trouble for crude oil prices. To the extent that such a move inspires haven-seeking support for the US Dollar, it might likewise punish gold.”
MoneyWeb – How Your Effective Income Tax Rate Has Changed
“It was widely expected that personal income tax rates would remain unchanged, but the announcement that tax brackets would not be adjusted for inflation at all came as a surprise.”
“Even though the tax rate and brackets remain unchanged, an inflationary increase in your salary will increase your effective tax rate… For someone with R500k income, the same inflationary salary increase would see their net tax liability rise 9.4%!”
What we think
Last week we wrote that “it’s hard to predict where the Rand may head in the short-term and when the negative momentum will abate; for now, we can only take some encouragement from resistance levels at both 14.20 and 14.40. Given that the Budget Speech (with a huge focus on growth, jobs and Eskom) will take place next Wednesday, Nersa’s tariff decision is to be made on 15 March and Moody’s sovereign review is scheduled for 29 March, it would take an extremely brave (or clairvoyant) person to make bullish forecasts at this point.”Our range for last week (13.80 -14.40) turned out to be prudent: allowing for some pre- and post-budget jitters, while at the same time feeling that an element of fear and negativity was priced in.
We have spoken about the resilience of the ZAR over the past few months and believe that this remains so, notwithstanding the 5.5% sell-off in February – remember, last month was the best January in the Rand’s history, gaining 7.9% (a bit too much too soon in our opinion, despite our relative bullishness) and year-to-date, we are up 3.1%, better than most emerging markets other than Russia and Brazil.
Towards the end of last year, our base case through to the end of April was for the Rand to trade between 13.10 – 13.85. The main risk to this would of course be a negative Moody’s review on 29 March leading to significant sell-off.
Our range for the week ahead is thus 13.80 – 14.20.
Have a great weekend!