Assets tumble on Gordhan sacking
Cape Town - South African bank stocks tumbled and bonds
plunged as the rand headed for its biggest weekly slide since 2015 after the
firing of Finance Minister Pravin Gordhan raised concerns about the country’s
fiscal path and its investment-grade credit rating.
The rand dropped as much as 2.6 percent before paring the
decline to trade 1.5 percent weaker at 13.4832 per dollar by 10:03 a.m. in
Johannesburg. Benchmark 10-year government bonds tumbled the most in seven
months, sending the yield soaring by 38 basis points to 8.89 percent, while an
index of bank stocks fell 4.9 percent, the most since August.
The rand was one of the top three emerging-market
currencies last year and early 2017, but politics are again casting a cloud
over the nation’s assets. Gordhan had fended off a downgrade in South Africa’s
rating to junk, and his commitment to curb spending and government debt had
endeared him to investors. He clashed with President Jacob Zuma over the
affordability of building nuclear power plants and the management of
state-owned companies.
“We regard this is as a devastating turn of events for
South Africa,” Sean Ashton, chief investment office at Anchor Capital in
Johannesburg, said in a note. “The rand has already responded swiftly, but we
believe more weakness could follow. Shares of banks, retailers and listed
property will come under significant pressure,” as would bonds, he said.
Zuma replaced Gordhan with Home Affairs Minister Malusi
Gigaba, the Presidency said in a statement Friday. African National Congress
lawmaker Sfiso Buthelezi takes over from Gordhan’s deputy, Mcebisi Jonas.
Read also: Gordhan's ouster has severe economic consequences
The currency was heading for a 7.2 percent loss for the
week - the worst such performance since the last time Zuma rocked markets with
a finance-minister firing. Back in December 2015, it was Nhlanhla Nene’s ouster
that hurt confidence - an episode that ended with Zuma bringing back the
respected Gordhan to office.
One-year interest-rate swaps rose most since December
2015 and forward-rate agreements climbed as traders priced out any chance of a
rate cut in the next year. Yields on the country’s $2 billion of Eurobonds due
October 2028 jumped 25 basis points to 5.09 percent, close to the highest this
year.
Shares
Shares in financial companies and retailers bore the
brunt of selling of Johannesburg stocks as the general retail index dropped 3.5
percent and insurers fell 2.7 percent. The overall benchmark index was little
changed by 9:53 a.m., supported by rand-hedge stocks that benefit from weakness
in the currency.
“If the current situation with the new finance minister
continues, interest rates are not going to be cut anymore in South Africa,
they’ll probably go up; the long bond will go up and stay up and we will get a
credit downgrade - and all of that is just not good for domestically orientated
shares,” said Wayne McCurrie, a money manager at Ashburton Investments.
“Any company that has the majority of their business in
South Africa and is reliant on the South African economy will take strain,” he
said. “Any company that has big overseas interests, or is in fact an overseas
company, their shares will go up on the back of the weak rand.”
‘Buying opportunity’
Politics aside, the generally positive environment for emerging
markets, and synchronous pick-up in global economic growth, argues in favour of
South Africa, with its mining assets. Its currency enjoyed a 12.6 percent jump
against the dollar last year - behind only Brazil’s real and Russia’s ruble
among emerging markets, according to data compiled by Bloomberg.
“The annoying, frustrating thing from the South Africa
perspective is that you don’t want political worries now, because things are
trending up, things are picking up,” Moz Afzal, global chief investment officer
of EFG Asset Management, said in an interview in Singapore. “South Africa is
pretty much in the penalty box” for investors now, he said.
South African assets may present a buying opportunity, if
sovereign ratings downgrades or mass cabinet sympathy resignations materialize
and lead to further rand weakness, according to Societe Generale.
“Despite the fraught political situation in which South
Africa currently finds itself, we note that dynamics past the immediate horizon
favour out-performance in the country’s assets,” Phoenix Kalen, London-based
director of emerging markets strategy at Societe Generale, wrote in report
dated March 31. The bank’s analysts say that making short bets on the rand is
expensive and seldom works. Kalen advised waiting “for the dust to settle
before entering long positions.”
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