Time to tighten your belt

What we know

How nice it was this week to get such a strong sense of optimism flowing throughout the country.  President Ramaphosa’s swearing-in ceremony was swiftly followed by a civilised and unifying SoNA, a stark contrast to the unruly, downbeat scenes we’d become accustomed to in recent years.

Thereafter thoughts turned to what the new Cabinet may look like, with commentators choosing their favoured line-up like a Superbru fantasy league submission.  In the end, Cyril took a pragmatic approach and chose not to rock the boat too quickly, especially ahead of the Budget.  As such, the ZAR consolidated its recent gains, while adopting a “wait-and-see” approach to Wednesday’s budget speech.

It was interesting to see that as the speech started (at which time a the full statement is also released) the ZAR strengthened about 10c against the USD and thereafter remained fairly stable throughout, a signal to us that the market had largely priced in much of what was to be said.  Knowing that it would be a “tough budget”, enough was done to suggest we’re moving in the right direction and that the ratings agencies may well continue to wait and see how things develop over the coming year.

Without summarizing every point made (see here for a brief recap) the hero-villain of the piece was VAT, which was increased for the first time in almost 25 years by 1% to 15%.

While many will not be happy about this, citing its regressive nature, it was necessary and we are encouraged by the fact the new ANC leadership was prepared to make a decision that may not be politically popular among much of its support base, especially with an imminent election looming.

Increases in estate duties, the general fuel levy, “luxury” goods  and  “sin” taxes will bolster revenue further, much of which will still be dwarfed by the R 57 billion allocation to free higher education over the next three years.

At a bigger picture level, the focus remains firmly on debt reduction going forward, while the increased 2018 GDP growth forecast of 1% (from 0.7% in October) was welcome news.

What others are saying

19 February 2018

Business Day | article: Rand Loses grounds amid consolidation

“The CR [Cyril Ramaphosa] factor is likely to give the domestic markets further traction in the near term. However, budget and policy implementation are what the real money accounts and rating agencies will be scrutinising,” said head of fixed income dealing at Sasfin Wealth.

IOL Business Report | Opinion – Remgro could outperform SA economy

“The changing political climate in SA is a miracle in the making. For the first time in many years, there is interest in stocks that could outperform in a strong domestic economy.”

20 February 2018

The Citizen | Mabuza will be deputy president, Say sources

“ANC deputy president and outgoing Mpumalanga premier David Mabuza is set to become the deputy president of the country; The Citizen has been reliably informed.”

“…There is still yet to be any indications of a shuffle taking place, likely as the new administration wants to ensure a smooth passage of the coming Feb 21 budget, but one is most definitely expected sometime in the near future.”

21 February 2018

Fin24|Budget article – Budget 2018 could be enough to avoid downgrade – economist

…”sufficient on its own not to necessarily precipitate a credit rating downgrade from Moody’s, or any of the other two key credit rating agencies (Fitch and S&P)”… “Looking forward, the expected cabinet reshuffle is the next event which could provide further support to investor sentiment and the rand,” said FNB chief economist

Bloomberg | Markets – World-Beating Bonds Get Second Wind After S. Africa’s Budget

“A combination of better growth, lower inflation, and a central bank rate-cut bodes well for the local bond market… Coupled with a stronger rand and rate-cut expectations, we believe government bonds could have a strong rally.” Morgan Stanley analysts including James Lord and Min Dai said in a note to clients on Wednesday. Read

22 February 2018

Times Live

“According to a report in Business Day, sources who attended a cabinet lekgotla in the province last week that Mabuza indicated he could be departing as early as next week.”

This is the strongest indication yet that Mabuza might be headed for the Union Buildings to take up the position of deputy president of the country, with a cabinet reshuffle by President Cyril Ramaphosa on the cards.

RMB Global Markets Daily: The rand will eventually mean-revert – on global factors

“Currently, the rand is around 5% stronger than its long-term mean. This will eventually correct. The key word is “eventually”. Rand cycles are long – around seven years long, on average. History suggests that the rand can, and even probably will, strengthen further before the mean reversion exerts.” Said Currency Strategist

What we think

Formulating a “house view” on the ZAR is extremely challenge when each week seems to bring with it a new BIG NEWS item likely to impact on the local currency!  The outcome of most of these events has been hanging in the balance for several weeks, making probably forecasting extremely difficult.

Below is a summary of key market events from the past few months:

Mid-term budget  = Severe ZAR sell-off
Run-up to ANC Conference  = Start of ZAR rally as CR appears in contention
ANC Conference  = Further ZAR strength as CR wins
Speculation Zuma won’t stay  = Continuing strength/consolidation
Deluded president tries to delay inevitable  = Limited increase in ZAR volatility
Zuma goes, CR steps up, SoNA  = ZAR tests best levels again
Budget is well received  = ZAR consolidates recent gains

We’ve said it for some time that now is when the hard work begins and we re-iterate: we are not bearish, we simply believe that much good news has been priced in and that sub-12 is too strong. At the same time, trade a few percent either side of 12 does represent a sustainable re-setting of the ZAR.

Next up will be the highly anticipated cabinet changes and given the optimism currently felt towards CR and the new leadership, the market is surely pricing in some sensible and popular appointments, which in turn should provide continued positive sentiment in the short-term. The biggest risk for now would be a seemingly overdue recovery in the USD (which would negatively impact emerging market currencies), together with any negative comments from the ratings agencies next month.

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Have a great weekend!