Business & Economy

Friday, 12 July 2019 13:07

CURRENT SA MARKETS - Time to throw in the towel, or should we hold out for a hero?

Written by 
Founder and Director of CM Trading Daniel Kibel

Questions that are most probably top of mind for a multitude of foreign investors is ‘Why South Africa and why now?’, and one could be forgiven for being unsure as to the answer.

It is no secret that the South African markets have been in a state of flux. In his first SONA last year, Cyril Ramaphosa promised “a major push this year to encourage significant investment in the economy”. Pivotal to this push, foreign investment from firms and individual investors outside of our borders was necessary. But, taking into account the dismal financial results reported by Moody’s in Q1 2019, will President Ramaphosa be able to make the necessary changes and reforms to help economic growth accelerate to as high as 3% by 2022?

According to the group, in a macro-analysis released at the beginning of June 2019, the odds that South Africa may experience a technical recession are high. This, in a large part, can be contributed to the widespread power outages experienced so far in 2019 that have had substantial negative ripple-effects, particularly for the mining and manufacturing sectors.

The task of resuscitating South Africa’s economy is certainly an onerous one, with the reality being that now is the time to dig deep as a country and harness all available resources. But it isn’t all doom and gloom on the investment front. With the recent ANC election win, under the leadership of Ramaphosa, hopes are high for renewed reforms that could potentially tackle the unemployment rates and provide a re-energised push to ignite growth.

Whilst financial markets are generally positive towards South Africa at the moment, an underlying sentiment that seems to be weighing on investors is whether government can effectively address the Eskom issue. After more than a decade of increasingly slow growth, and an exponential rise in joblessness, immediate policy priorities from Ramaphosa are a crucial first step to addressing South Africa’s complex economic challenges.

So, the question still remains – Why South Africa and Why Now?

The outcome of the election has been in line with market expectations and sentiment towards South African markets remains tentatively positive. The announcement of a drastically smaller, reshuffled cabinet this month is also bound to alter our economic course. Add to that Moody’s decision to skip the much-anticipated assessment of SA’s sovereign credit rating until November 2019, and it seems that for now, South African markets have been granted a reprieve, albeit a small one.

The Rand is expected to weaken over the next few weeks both in terms of the USD and the Pound rate, but the dominant position of the South African economy on the African continent, and the liquidity of the Rand on international markets still make the ZAR the currency of choice for investors seeking African exposure.

Although things look precarious, investors shouldn’t throw in the towel just yet. A look at analysts’ consensus forecasts (according to Thomson Reuters) on individual shares (based only on price forecasts, i.e. excluding dividends and adjusted according to their weight in the index) in the FTSE/JSE Top40, shows that analysts still expect the Top40 Index to be trading 21.6% higher from current levels (48 465 as at 28 May 2019).

As the famous John Templeton said, “Bull markets are born on pessimism, grown on scepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is often the best time to buy, and the time of maximum optimism is often the best time to sell.”

Sources:

https://businesstech.co.za/news/finance/321905/high-chance-of-recession-in-south-africa-moodys/

https://www.poundsterlinglive.com/zar/11501-the-rand-is-a-sell-says-bank-of-america-technical-analyst

https://www.fin24.com/Economy/moodys-delay-is-good-news-for-the-rand-say-analysts-20190330-2

https://www.fin24.com/Economy/South-Africa/moodys-likely-to-keep-sas-credit-rating-at-investment-grade-post-election-analyst-20190516

https://www.moneyweb.co.za/news/economy/the-rand-isnt-sas-share-price-anymore/

https://www.fin24.com/Finweek/Investment/is-now-the-right-time-to-sell-your-shares-20190605 

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