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Traders are rapidly discovering the truth about playing asset classes in South Africa, a country which now epitomises the definition of a developing country – places where politics supercedes economics. My lesson in this reality came two decades back during a spell at banking group Absa where among my responsibilities included engaging with foreign investors. No matter where these big money managers hailed from, their process was identical – the first 80% of our discussion was on the country; only the last few minutes on the company itself. Mr Market’s focus is even more extreme in movements of the Rand, the country’s national “share price”. Right now this currency’s performance is directly correlated to perceived progress in solving the political challenges. When it looks like the deeply complicity President Jacob Zuma was being edged closer to the exit, the currency has strengthened – witness its world topping performance in the three months to end September. But as that recedes, or when organs of State are deployed against those fighting patronage and plunder, the currency tanks. Best advice – long-term, truth and sensibility will prevail. But leave the day-to-day machinations to the gamblers. – Alec Hogg
By Xola Potelwa and Colin McClelland
(Bloomberg) — The wheels are coming off the rally in the South African rand.
The currency has swung to being the emerging world’s worst performer this month, from best in the third quarter, after a move to prosecute Finance Minister Pravin Gordhan sparked a sell-off of South African assets. Volatility has jumped to the highest among currencies tracked by Bloomberg, catching out investors and driving others to steer clear of South African markets until the political storm has passed.
The roller-coaster ride is testament to the depth of concern among investors over the battle between Gordhan and supporters of President Jacob Zuma for control of the nation’s purse strings. It also highlights the difficulty of assessing political risk in an emerging democracy such as South Africa, with some investors seeing recent events as a tipping point, while others regard them as noise that will blow over.
“The rand today is very, very hard to trade,” said Guillaume Tresca, a Paris-based senior emerging-market strategist at Credit Agricole SA. “On a daily basis, it’s a nightmare. You can have a rally for one or two weeks and it will perform very strongly, and all of a sudden you have a headline on the political risk and you can lose all your money in five minutes.”
In April, as risks to South Africa’s credit ratings rose and Zuma faced an impeachment vote, Credit Agricole forecast that the rand would weaken to beyond 16 to the dollar. Instead, it rallied to 13.2008 in early August.
The rand gained 7.3 percent against the dollar in the three months ended September, the most among 24 emerging-market currencies. It ended last week 4.2 percent weaker, lagging behind its developing country peers.
Foreigners dumped R14.3 billion ($1 billion) of the country’s bonds and stocks last week amid concern that Gordhan may lose his job. The currency plunged as much as 4.3 percent on Oct. 11 after he was summoned to court on fraud charges. The next day, it gained as much as 2.5 percent as the head prosecutor said the charges could be reviewed. Volatility rose to the highest since June.
Greatest Volatility in Rand
The rand is the world’s most-traded currency relative to gross domestic product, according to Renaissance Capital, with global volumes averaging about $51 billion every day, figures from the Bank for International Settlements show. Three-month implied volatility for the rand to the dollar, an indication of future price swings options traders expect, is the highest of 29 major and emerging-market currencies monitored by Bloomberg.
Traders paid the highest premium in three months for options contracts to sell the rand over those to buy it on Oct. 11, as Gordhan was served with the summons. The three-month risk-reversal has since retraced to 3.6.
The rand gained a second day on Tuesday, strengthening 0.7 percent to 14.0493 per dollar by 8:23 a.m. in Johannesburg.
The currency will weaken to 17 to the dollar by year-end after South Africa’s credit rating is cut to junk, said Peter Attard Montalto, an economist at Nomura International Plc in London who says markets are under-estimating the political risks that affect the value of South African assets.
“The volatility in forecasts just shows us it’s all ultimately down to personality politics at the end of the day, which is the worst sort and the hardest to factor in and forecast around,” he said. “This is the depth of intrigue and unpredictability, ultimately.”
Not everyone is bearish on the rand or staying on the sidelines. Standard Chartered Plc said last week the “political noise” in South Africa is an opportunity to build “long” rand positions. Societe Generale SA last week upgraded the country’s debt to overweight.
Francois Botha, who helps oversee R15.5 billion of assets at Novare Investments Pty Ltd. in Cape Town, agrees that the rand’s volatility makes it wise to be cautious. Investors who moved funds out of South Africa after Zuma fired Finance Minister Nhlanhla Nene in December “got really hurt,” he said.
The South African Rand has gained vs. the £, even thought the SA finance minister has been charged with of criminal misconduct #Brexitnomics
— Leighton Evans (@leightonevans) October 17, 2016
“It’s not the best move to react now, now that the currency has already been blown out,” Botha said. “We’re slightly more cautious because we’ve seen since the start of the year how the currency can react and it can appreciate quite a bit, and you don’t want to be caught on the wrong side of that.”
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