Dear Client
The year started off with promising signals
Growth in the US economy was more robust. Commodity prices continued to rise and the drought in South Africa was all but gone. The positive economic data coupled with disciplined management of the South African finances looked likely to stave off the credit downgrade. We read more and more analysts and market commentators becoming bullish on local equities that were at attractive prices. International investors looked to buy emerging market bonds to benefit from the relatively high interest rates and the rand strengthened to below 12.50 to the USD. But in the background the rumours of the cabinet reshuffle kept persisting and so we had to keep hedging the portfolio with rand hedge stocks.
And then it happened…
Zuma reshuffled the cabinet and replaced the credible Finance Minister. The new Finance Minister, Malusi Gigaba, wasted no time in speaking about “radical economic transformation” and confirming that the Nuclear deal will go ahead. And so South Africa’s USD debt was promptly downgraded to sub-investment grade by rating agency Standard and Poors. The Rand weakened by 12% and the JSE All-share index rallied 2.7% as approximately 60% of earnings come from outside South Africa. We were able to profit from the volatility and now have a higher allocation to Rand hedge stocks.
Where to from here?
There is a lot of uncertainty now. There is still high demand from international investors for Emerging market equities and bonds. Especially now that the local equities are at more attractive levels. So IF Zuma goes the rally in the Rand, local banks and property will be sharp. Unfortunately, the more likely scenario is that Zuma stays at least until the December ANC conference. This means further credit downgrades later this year, more Rand weakness and international investors taking the wait and see approach. At Courtney Capital we will continue to look for opportunities to take advantage of the volatility either way in order to deliver returns for our clients.
The Courtney Capital Team
April 2017