Rand extends slump but Morgan Stanley thinks it may still hit R11.4/$ by year-end

JOHANNESBURG — At the time of writing on Friday morning, the rand had weakened dramatically to R13.22/$, in the process wiping out some gains made earlier this year during ‘Ramaphoria’. The weakness comes as it looks increasingly likely that SARB will keep the repo rate unchanged on the back of poorer-than-expected Q1 GDP numbers. The contraction in growth of 2.2% shocked many this week and means that Team Ramaphosa will have an uphill battle in meeting their growth targets for 2018. This week has brought many a South African back down to earth – but it may be a necessary humbling process if we’re ever to get the economy humming again. And as Morgan Stanley highlights in their note, the rand could strengthen again by year-end as Ramaphosa’s grip strengthens. – Gareth van Zyl

S. African Rand extends slump as central bank seen holding rates

By Colleen Goko and Robert Brand

(Bloomberg) – South Africa’s rand extended a slump after breaching 13 per dollar this week for the first time since December as investors bet there’s little chance the nation’s central bank will follow emerging-market peers in raising interest rates.

The rand weakened 2.3 percent to 13.2729 per dollar as of 10:27 a.m. in Johannesburg on Friday, leading declines against the dollar. Yields on benchmark government bonds due 2026 soared 23 basis points to 9.03 percent, the highest since December 15.

rands notes
Mixed denomination Rand currency banknotes are arranged for a photograph at a First National Bank (FNB) branch in Johannesburg.

Turkey on Thursday became the latest emerging-market central bank to deliver a surprise rate increase as currencies sag. The South African Reserve Bank, which targets inflation and has often stated it won’t act to bolster the rand, left its benchmark rate unchanged last month. The worst quarterly economic contraction in nine years suggests it won’t tighten anytime soon, according to Brown Brothers Harriman & Co.

“Rand weakness reflects a broad re-pricing of emerging-market assets within a context of rising U.S. interest rates,” said Win Thin, the firm’s global head of emerging-markets strategy. “This latest bout of rand weakness was triggered by the much weaker-than-expected first-quarter GDP report, which suggested that the Reserve Bank probably wouldn’t be hiking any time soon.”

With the Federal Reserve proceeding with policy tightening, and another interest-rate hike expected next week, emerging markets across the globe are bracing for a further selloff. Turkey joined Indonesia and India in raising rates. South Africa’s central bank’s policy is to let the currency float freely, and it didn’t take action during bouts of currency weakness in the past two decades.

Insignia of the African National Congress (ANC)

The rand reached its worst level since Dec. 15, days before Cyril Ramaphosa won the leadership of the African National Congress, putting him on course for the presidency. The currency’s decline worsened after the drop in Brazil’s real dampened sentiment toward risky assets, driving losses on a gauge that tracks emerging-market currencies to the most in more than a week.

The GDP report this week showed that South Africa’s economy shrank the most in nine years in the first quarter, casting a pall over Ramaphosa’s promise to boost growth. His rise to power since December initially boosted sentiment and the rand following Zuma’s scandal-ridden tenure, but confidence indexes have now returned to where they were late last year as businesses seek lasting change.

Fragile State

After standing pat on the main policy rates last month, the central bank hinted that further loosening was off the table as inflation pressures build. Money markets are pricing in only 12 basis points of tightening over the next 12 months.

“It is clear that the economy is in a fragile state and it may take some time before we see any evidence of a Ramaphosa effect,” said Natalie Rivett, a senior emerging-markets analyst at Informa Global Markets in London.

Wall Street eyes EM bargains from Chinese stocks to the Rand

By Paul Wallace

(Bloomberg) – South Africa’s rand seems to be in plenty of investors’ bargain bins these days. So are the Colombian peso, Indian bonds and Chinese stocks as a slew of banks from Goldman Sachs Group Inc. to Morgan Stanley and Societe Generale SA advocate a return to emerging markets.

Investors are searching for cheap currencies, stocks and bonds following an emerging-market rout sparked by concerns over a strengthening dollar and rising U.S. yields. But the days when money managers could rely on high growth and low inflation to fuel returns across most emerging-market assets are long gone, according to SocGen.

“The world has moved on very quickly from a ‘Goldilocks scenario’ in which investors were able to pick up yield in a variety of asset classes, to an environment in which significantly more discernment is necessary,” SocGen strategists including Alain Bokobza said in a note on Wednesday.

Here’s where some analysts and investors are looking for value:

The Rand
Flag map of South Africa

South Africa’s currency has weakened 13 percent against the dollar since late February. Morgan Stanley and SocGen say it’s probably oversold, a victim of its status as one of the most liquid currencies among peers and as a bellwether for emerging markets.

Morgan Stanley, which forecasts the rand appreciating 16 percent by the end of the year to 11.4 against the greenback, sees a structural economic recovery on the back of Cyril Ramaphosa becoming president in February. The Wall Street lender doubts Tuesday’s weaker-than-expected growth figures — which sent the rand tumbling as much as 2.1 percent — will derail that progress. Goldman says the rand is one of the “clearest idiosyncratic opportunities.”

JPMorgan Chase & Co. is also bullish, holding an overweight position on South Africa’s local-currency bonds thanks to the rand’s expected stability and attractive real yields. It’s either neutral or underweight for all other local bonds among European and African emerging markets.

Still, it can be a risky bet. Strategists at Standard Chartered Plc closed long trades in the rand and rand-denominated bonds on Friday, just four days after entering them. That was after both trades hit their stop losses, or points at which investors should pull out of loss-making positions.

Colombian Peso

Latin America’s fourth-biggest economy should be a beneficiary of crude oil prices that have climbed almost 60 percent in the past year. JPMorgan has it as the biggest overweight holding in its basket of emerging currencies. Nomura Holdings Inc. is also optimistic. Craig Chan, head of emerging-markets strategy at the Tokyo-based bank, recommends shorting the Brazilian real against the peso.

Indian and Indonesian Bonds

Goldman says that the recent selloff of rupee debt has gone too far and advises clients to buy five-year Indian government bonds. Yields on securities maturing in May 2023 have risen about 150 basis points since September to above 8 percent, the highest in more than two years. India’s central bank raised its benchmark interest rate for the first time since 2014 on Wednesday, setting the stage for a gradual tightening cycle as economic growth rebounds from a four-year low and price pressures build.

JPMorgan likes Indonesia’s local bonds. In a June 1 note, analysts including Anezka Christovova applauded the government’s “commitment to keeping a firm leash on its twin balances — fiscal and current-account deficits — which already stack up well in the EM world.”

China’s Stocks
Flag map of the People’s Republic of China

SocGen and Goldman think investors should load up on Chinese stocks. The former says they will benefit from China’s growth rate, which at 6.5 percent is still one of the highest in the world. The country’s inclusion this month in MSCI’s indexes and a “low correlation with developed equities” also count in their favor.

The forward price-to-earnings ratio of stocks on China’s main bourse in Shanghai has dropped to 11.5 from 13.5 in January. They’re now cheaper than emerging markets as a whole and substantially less costly than the MSCI World Index.

Turkish Eurobonds

Fidelity International sees value in Turkish external sovereign debt following the third rate increase by the country’s central bank in less than two months to stabilize the lira. The dollar bonds are mispriced relative to other BB-rated countries, while debt-to-GDP is moderate compared to may of its peers, according to Paul Greer, a London-based portfolio manager. The country is willing and able to repay its debt, he said.

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