Similar to Brazil, UBS expects SA rand to strengthen on corruption cleanout

Flag map of Brazil

JOHANNESBURG — When it comes to the economy, South Africa in 2018 (so far) has a better story to tell than it did in previous years. The rise of Cyril Ramaphosa and the demise of Jacob Zuma have fed into a narrative that South Africa is in for better days. And just like Brazil (which had its Operation Car Wash moment), South Africa is also trying to clear its body-politic of corrupt players. Time will tell if South Africa is truly on the mend, but, for the time being, the country is gradually becoming a favourite among emerging market pundits. – Gareth van Zyl

By William Mathis and Ben Bartenstein

(Bloomberg) — A corruption scandal that led to a political transition and economic reforms was the recipe for a rally in Brazilian assets, and South Africa is at a similar turning point.

Michael Bolliger, the head of emerging-market asset allocation at UBS Wealth Management, says South Africa’s new leader and the corruption charges lodged against former President Jacob Zuma on Friday are setting the stage for a repeat of what happened in Brazil. The stock market there has more than doubled and the real has surged 18 percent since early January 2016, when investors began betting on a change in government.

Traders should “act swiftly” and stay invested in South African assets to fully benefit from the expected steep jump in prices, according to the $2.4 trillion investment firm. In Brazil, that rally preceded an acceleration in economic growth and improved fundamentals as President Michel Temer took steps to contain public spending.

A collection of mixed denomination South African rand banknotes sit in an arranged photo in Johannesburg. Photographer: Waldo Swiegers/Bloomberg

Of course, it hasn’t been entirely smooth cruising for Temer, whose approval rating is the lowest among the leaders of Latin America’s major economies. His failure to push a pension overhaul through Congress drew sovereign downgrades deeper into junk territory.

South African President Cyril Ramaphosa could face similar political challenges as he looks to bolster an economy burdened by a budget deficit and mounting debt load. He may have a slightly easier time as the urgency for more austerity has been eased by changes to the next budget and a looser monetary policy.

South African equities and bonds are the country’s most attractive assets, according to Bolliger. He expects the rand to appreciate almost 9 percent to 11 per dollar.

Bolliger says risk-tolerant investors should also be watching Venezuela, where a near-term transition of power could turn around the economy and benefit bonds issued by the government and state-owned entities. While the election in May is unlikely to unseat President Nicolas Maduro, the nation’s deepening recession will probably spur regime change in the next six to 12 months, according to Siobhan Morden, Nomura’s head of Latin America fixed-income strategy