James Mckeown, director of Domisa Treasury shares weekly market updates, along with his current view on the South African market.
Levels at the time of writing: USD 17.61; EUR 20.80; GBP 23.05
Government is corrupt and occupied largely by inept, self-serving individuals with no goal or objective other than self-enrichment (via family members who all happen to be accomplished business people). Municipalities and SOEs are drowning in debt, overstaffed and under-skilled. The education system is held hostage by unions who merrily trample over the rights of children in the chase for power and influence. Add to this the irrationality of aspects of the lockdown which are causing unnecessary economic damage, particularly when viewed alongside the nonsensical accommodations afforded vote-wielding sectors of the business and union community.
What’s new though?
That’s the point – these are all known knowns. There’s not a piece of new news or information suddenly adding to the heavy load we are already carrying in SA. SA’s asset is its resilient and highly entrepreneurial private sector. It has survived many decades of misguided government in many guises and will do so again. No doubt there is currently a degree of hibernation with Covid-19 and its implications, which SARS are flagging in significant revenue shortfalls (known known).
The condemnation of recent Covid-related corruption allegations has been swift and ear-shattering and, most importantly, from all sections of society. The threat from the voting booth is the only consequence which will drive action. Let’s see.
In short, we don’t even need good news we just need news that’s not quite as bad. August continues its form as a bad month for emerging market currencies.
Overall we struggle to envisage news-flow that darkens the clouds over SA & ZAR any further. As one of SA’s biggest exports gold above $2,000 should provide a solid backstop to ZAR.
- USD weakness: US economic outperformance of recent years has driven significant USD strength. US mismanagement of the Covid pandemic and the forthcoming election uncertainty are leading to questions about sustainability, favouring other currencies recently. Between March and today GBPUSD has rallied from 1.15 to 1.31 (14%), EURUSD from 1.08 to 1.19 (10%). USDZAR at 17.61 is actually flattering
- EM weakness: TRY, ZAR & BRL have been significant underperformers in global currency markets. Global risk aversion is strong with US-China tensions exacerbating the impact on emerging market currencies generally
- SA Govt bonds: Currently yielding 9.3%, with inflation around 4% and the repo rate at 3.5% (lowest since 1998 after SARB has lowered by 300bps this year). Prime lending rate is 7%. Your Mercantile ZAR accounts currently pay 4% pa on cash balances with immediate availability
- Residential property: In line with estate agency news flow we have seen a small increase in foreign buyer activity in residential real estate with ZAR weakness and a “buyers market” making for attractive assets. As a treasury service we manage local payment of bills and invoices on behalf of our foreign owner clients, depriving them of the joys of dealing with Telkom and the municipalities.
Tough to make a call in this market. Keep portfolios well-balanced, exposures managed and a strong handle on cross-currency cashflows. Don’t under-estimate the risk and things may get better from here.
Please do not hesitate to contact Domisa on +27 21 205 1980 or via the form below , should you have any queries or transactions.
