While the South African economy is still reeling from the widely criticised and abrupt events that saw the country change finance ministers three times in just four days, a local financial analyst has advised investors to identify the silver lining behind the dark cloud.
Instead of advising investors to avoid South Africa as an investment destination, Purvance Heuer of Simonis Storm Securities (SSS) believes now is the time for investors to get good value for money.
South African President Jacob Zuma on Sunday night appointed Pravin Gordhan as his third finance minister within a week. Gordhan replaced little-known David van Rooyen, who held the position since Thursday last week, after replacing the well-respected Nhlanhla Nene.
“There is a silver lining for anyone that is interested in investing in South African stocks. There are quality companies in SA, especially Rand hedges that now provide very good value as investment options after the kneejerk reaction from markets late last week,” said Heuer, the director of securities at SSS.
“Obviously my initial view is that the international market is not receiving it well, especially because of the abrupt manner in which it was done. There is a loss of confidence in SA at the moment and you can immediately see it across all numbers. The South African Reserve Bank (SARB) may have to intervene by raising interest rates, which will consequently put pressure on Namibia to do the same since they didn’t do it last week,” Heuer said.
Heuer noted that the Rand – and by default the Namibia Dollar – depreciated by more than 5 percent over a four-day period. He pointed out that the spreads on bond yields widened by 150bps as international investors withdrew large amounts of money from SA. This is largely because more than 50 percent of the Johannesburg Stock Exchange (JSE) is owned by foreign investors. In addition, the four largest banks in SA lost as much as 23 percent of their value at one stage.
“The impact of the subsequent U-turn by Zuma in appointing Pravin Gordhan and removing van Rooyen will not be immediately visible, but it will surely take international investors a long time to regain confidence in the South African fiscus. Although bank shares, the currency and bond yield have stabilised somewhat today (Monday, December 14) after the appointment of Gordhan, there remain structural problems that cannot be resolved immediately,” Heuer added.
As for the impact on Namibia, Heuer remarked that it is expected the depreciating Rand will add pressure to inflation, even with low international oil prices.
“If the SARB is to raise rates to strengthen the currency, Namibia will have to follow suit very soon. Before the events of last week we expected Namibia to raise rates three times next year (i.e. 75bps). This may be inappropriate to keep up with any change in SA monetary policy,” Heuer cautioned.
Meanwhile, Suta Kavari, an investment analyst with Capricorn Asset Management, said President Zuma sparked outrage and a mass investor exodus on December 9 when he fired Nhlanhla Nene.
“The move sent the rand tumbling to new lows, bond yields spiked, and the JSE went into turmoil. In a move considered highly unusual, the JSE issued a statement quantifying the market turmoil that followed the shock removal of Nene late Wednesday night,” Kavari said.
He continued that the JSE’s chief executive officer, Nicky Newton-King, said the life savings of South Africans would be severely affected by the unprecedented market movements, describing the exceptional trading volumes across most platforms of the JSE on December 10 and 11. The JSE added that investors, from individual retirees to huge pension funds, saw the value of their holdings plummet.
“The average daily value traded in the equity market on those two days – at R47.8 billion – was more than double the year-to-date average of R19.9 billion. The FTSE/JSE Banks Index lost 18.54 percent, while the FTSE/JSE all-share index was down 2.94 percent. The entire market cap fell R169.6 billion, from R11.35 trillion to R11.18 trillion (1.49 percent). In the bond market, the benchmark R186 started the week at a yield of 8.66 percent and closed on 10.40 percent. By contrast, on January 29, 2015 the yield was 7.055 percent,” Kavari noted.
The JSE announcement coincided with Business Leadership SA’s terse statement lamenting the government’s decision.
“It is wrong to attribute the poor performance and declining trend of the economy solely to global economic factors. The perceptions, confidence and consequent decisions of local and international investors are the major determinants of the growth of the South African economy,” commented Business Leadership SA, which represents 78 of the biggest companies in South Africa.
Also weighing in on the debacle was the National Association of Automobile Manufacturers of South Africa (NAAMSA), who pointed out that the finance ministry is in many respects unique and different from other government departments.
“It requires continuity and stability as it constitutes the portfolio which interfaces with the global economy and international finance institutions. Recent events have had a devastating impact on South Africa’s financial markets, manifested in the form of sharply lower share and bond valuations, as well as the substantial further depreciation in the Rand exchange rate and reflect a serious loss of confidence in South Africa’s prospects by local and international investors,” said NAAMSA president Dr Johan van Zyl.
He added that consistency in macro-economic policy, supported by fiscal discipline and stability, are of paramount importance if South Africa is to grow its economy and avoid further investment downgrades by international ratings agencies and the resultant significantly negative economic consequences.
“The country is presently at a critical juncture, economically, which urgently requires leadership to stabilise the markets, to reassure investors and avoid further damage to an increasingly fragile economy,” said Dr Van Zyl.