It’s time for a recovery in South Africa’s crushed markets. That’s the view from the likes of strategists at Goldman Sachs, Deutsche Bank and Credit Agricole after the rand fell to a record low and local bonds collapsed to send yields to the highest since the pandemic struck.
The calls for a turnaround are based on the country’s assets looking cheap after the selloff and a slowdown in US rate hikes, rather than expectations for a sudden improvement in the economy or politics. While there’s plenty of bad news, it’s mostly priced in, they argue.
“Given how far South African asset prices have already fallen, we think it more likely that markets will stabilise close to current levels, with moderate upside to the rand in the short term and more considerable upside to bonds — both local and external — in the medium term,” said Goldman strategists including Kevin Daly, targeting 4% rand gains within three months to R18.75/US$.
That chimes with a call just out from Credit Agricole for R18/$ by September. Last week, Deutsche Bank strategists including Christian Wietoska moved South Africa’s local-currency bonds to “strong overweight” due to “extremely cheap” valuations, forecasting 10-year yields at 10%, versus over 12% currently.
The calls may already be drawing investors. The rand rallied nearly 1% Friday, and South Africa’s dollar bonds climbed to send yields on 2030 notes down 28 basis points, the most since November.
A rand recovery to around R18/$ would still leave it down for the year so far. The currency crashed to a record low near R20 on Thursday and is 13% weaker in 2023, making it the worst performer among developing-nation peers after the Argentine peso.
Heavy power cuts have weighed on the currency throughout the year, simultaneously fanning inflation and lowering potential growth. That’s put monetary policy in a difficult position as more interest rate hikes to stem inflation will depress already low growth.
Geopolitics
On top of that, geopolitics has been the latest trigger for weakness as traders assess Pretoria’s relationship with Russia. President Vladimir Putin’s potential visit to South Africa for a summit in August will likely keep sentiment fragile.
The Goldman Sachs strategists said that while there is a risk further bad news could cause asset prices to fall more, valuations are now unusually weak, implying that the market is already discounting it. Meanwhile Credit Agricole’s call is based on seeing some government action to improve the economy.
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“For this appreciation potential to materialise, the government would need to tackle the issue of the power outages more effectively, in order to restore market confidence,” said analysts including Sebastien Barbe in a note to clients. — (c) 2023 Bloomberg LP