Risks assets show mixed reaction to the budget

As the dust settles after the medium-term budget policy statement the response by local risk assets has been mixed, with equities rebounding on Thursday from an initial sell-off, while the rand and local bonds have continued to weaken.

The outlook for the local currency and bonds has become increasingly clouded analysts said, with the market blindsided by a budget that has been seen in most quarters as credit-negative.

The all share closed 1.47% higher on Thursday, more than recovering from Wednesday’s 0.57% fall. Shortly after the JSE closed the rand was about 40c weaker against the dollar from when finance minister Tito Mboweni began his speech.

The policy statement has rekindled some concerns that SA could lose its last remaining investment-grade status, with the all share’s recovery on Thursday coming despite a sharp fall by tech-heavy Nasdaq on Wednesday.

The jitters came as Mboweni upwardly revised the projected government budget deficit, pushing up the associated government debt-to-GDP ratio which analysts said raised red flags for nation’s finances.

“The higher budget deficit and gross debt figures are very negative and can easily give rating agency Moody’s reason to downgrade SA, even if only the outlook from stable to negative – which would at least keep us in investment grade,” said Gerhard Lampen, head of Sanlam iTrade.

Moody’s is the only major ratings agency that still has SA’s debt rating at investment grade, after S&P Global Ratings and Fitch lowered it to sub-investment grade in 2017.

The budget was “candid and disappointing”, said Nedbank strategist Mehul Daya, serving as a “double whammy” for the rand. The rand and local bonds were facing both local and external headwinds, including a stronger dollar and tighter global financial conditions, he said.

The market had “run ahead of itself” ahead of the budget, but gave back gains and more on news that the budget deficit target had risen, said Sasfin Wealth fixed-income analyst Alwin Chawasema.

Stocks with a big focus on the local economy, namely banks, retailers and other industrials, had a volatile session on the JSE. These sectors have been under intense selling pressure in recent months, largely reflecting investors’ pessimism about the country’s growth prospects.

The Treasury cut the growth forecast for 2018 to 0.7% from its 1.5% projection at the start of the year.

Standard Bank and Barclays Africa shares were each down by about 30% from their record highs, reached earlier in the year when sentiment was very positive when Cyril Ramaphosa took over as president. FirstRand and Nedbank are down about 20% from their record highs.

Banks however were sharply up on Thursday, gaining almost 3%, having firmed 1.44% on Wednesday.

“The market is not taking notice of numbers being flashed at them any longer. Actions are more important than words,” said Casparus Treurnicht, portfolio manager at Gryphon Asset Management.