Muted market reaction deceptive

President Cyril Ramaphosa’s announcement of a proposed amendment to the Constitution that outlines conditions under which expropriation of land without compensation can take place caused widespread panic on news and social media yesterday.

Less so with investors. While some weakness in the rand was evident, markets barely reacted. This could have reflected the fact that his announcement may have been a strategic move for the ANC to take control of the debate rather than any new news on the land issue, market participants said.  

The rand weakened by more than 1% on Tuesday evening, from R13.10 against the US dollar to R13.26 – a position it held by mid-Wednesday.

By midday trade on Wednesday, the JSE ALSI was up 0.18% at 57 538, although it turned marginally negative by early afternoon. The more than 1% drop in financials, however, may have reflected some uncertainty about the effect of land expropriation on banks.

Zwelakhe Mnguni, chief investment officer and co-founder of Benguela Global Fund Managers, said foreign investors are being more cautious about how the issue will be resolved and they do have fears of a Zimbabwe-style grab, which is probably why the rand pulled back.

While there are questions about how land expropriation will be implemented, the fact that there is commitment to a process, reiterated by Ramaphosa, could settle some nerves.

Mnguni said the land expropriation issue, together with the mining charter, is causing uncertainty and delaying the timing of investments.

The policy is not to take away productive land, and this should create some comfort around agricultural and real estate investment.

The potential vulnerability of banks has certainly created uncertainty, and banks may be more sensitive than other sectors to investor concerns.

Craig Smith, head of research and property at Anchor Stockbrokers, said all that was really announced is that the ANC would put forward a proposal to amend the constitution, but “there is still a bit of a road to go here.”

“This not really providing any real clarity on what expropriation will look like fully, and it still needs to pass through parliament.”

Nevertheless, he said markets are “definitely unlikely to like it” – although it’s too early to say if it’s positive or negative as the provisos or circumstances under which expropriation could take place are still unknown.

The rand’s weakness was probably a reaction to the sudden news flow, and the fact that Ramaphosa’s announcement could be viewed as a shock considering the timing of it.

As there hasn’t been any real foreign direct investment drive into real estate or property in the recent past, it’s unlikely that Tuesday’s announcement will have a meaningful impact in terms of direct foreign flows, Smith said. “From a listed point of view I expect it would be overall slightly negative,” he said.

There has essentially been no new news on land expropriation, said Canon Asset Management chief strategist Adrian Saville, and reaction in capital markets was fairly muted.

The rand and long dated bonds are reasonably attractive at current levels, he said, but the land issue will continue to create uncertainty.

Land, and leadership uncertainty coming up to elections, adds some premium to capital market rates, he said. It may be tough for banks, and those companies that are “land and agriculture-facing”.

Sygnia’s head of investments, Iain Anderson, said market reaction was muted either because the market was expecting the gist of the announcement or because market players knew it was a political manoeuvre, but it nevertheless created uncertainty.

It came at a particularly bad time for South Africa from an investment point of view, he said.

There has been a period of 10 years of global expansion and the last two years have been great for emerging markets, but South Africa missed out on that completely. Sygnia hoped that, with Ramaphosa coming in, global conditions would stay in place long enough for South Africa to take part in the emerging market growth trend. But the end of quantitative easing and rising interest rates in US, and trade wars “spells the end of the music for emerging markets” just at the time when South Africa is trying to put in place policy certainty and foundations for economic growth.

“And then we get announcements like this,” he said. “It is the end of the emerging market party and we didn’t get to participate, and now we need government to be doing the right thing, and it is not.”