Rand could be poised for ‘sharp’ recovery

The rand could be poised for a sharp recovery once the dust engulfing emerging markets clears, according to the head of Old Mutual Investment Group.

In a note to clients, Johann Els also argues that the market over-reacted to the recent local GDP numbers, which showed the economy slipped into a recession for first time in a decade.

The rand was caught up in the middle of what some described as a storm, falling to a two-year low against the dollar over the past week, before regaining some of the losses. A weaker currency increases the cost of imported products, which, over time, increases prices consumers pay for these goods.

The volatility in the rand has coincided with elevated international oil prices, leading some economists to believe that the Reserve Bank could raise interest rates when its monetary policy committee concludes its meeting next Thursday.

Els argues that emerging markets are unlikely to go into a full-blown crisis and their economies are in better shape than they get credit for, save for a few. Turkey and Argentina’s currencies have recently been battered by emerging-market alarm and concerns about the long-term economic health of the two countries.

Turkey has since responded with an aggressive increase in interest rates, helping stabilise its lira, which, in turn, boosted sentiment towards the emerging-market universe, which is often treated as a single homogenous group during bouts of global risk-off trade.

Els says emerging markets have a “better structural position regarding growth, interest rates, current account and fiscal balances, and inflation, than they had during 2013’s [so-called] taper tantrum.” The expression refers to the US Federal Reserve’s decision to taper its quantitative easing programme. The Fed’s decision hit those emerging markets, which ran huge current account and fiscal deficits.

Els contends that while SA needs structural reforms to put the economy on a sound and sustainable footing, he believes the groundwork has been laid by President Cyril Ramaphosa, but he says Ramaphosa needs a fresh mandate to follow through on economic reforms, which economists have long flagged as vital to unlocking growth potential.

Els believes pessimism has peaked in SA, and things should start to get better. “Should we see significant improvement in government policies after the 2019 elections, it will likely lead to a sharp recovery in confidence — including local consumer and business, and foreign investor confidence.”

The rand was at R14.8728 against the dollar in late trade on Friday, bouncing back from the two-year low of nearly R15.70 it reached just more than a week ago.

South African government bonds are also better off, with the benchmark R186 last bid at 9.16%, from a recent high of 9.34%.