South African Assets May Extend Gains as Market Cheers Election

  • Rand at nine-month high versus dollar as ANC loses support
  • Election bruising may force economic rethink, analysts say

South African assets are set to extend gains as the ruling African National Congress’ election bruising adds pressure on the party to introduce economic reforms that will boost growth and cut unemployment.

The rand gained for a third week, rising 0.7 percent to 13.7792 per dollar by 5 p.m. in Johannesburg, after rising earlier to the strongest level on a closing basis since October. The rand pared is advance after better-than-expected U.S. jobs data boosted the dollar. Yields on government rand bonds ended the week five basis points lower, dollar yields declined and the cost of insuring the nation’s debt against default dropped to a nine-month low.

President Jacob Zuma will face renewed calls to quit after partial election results showed the ANC losing outright control of the capital, Pretoria, and Johannesburg in its worst electoral showing since apartheid ended 22 years ago. With 86 percent of ballots counted, the ANC had nearly 55 percent of total support in the country, down from 63 percent in the previous municipal poll in 2011, while support for the main opposition party, the Democratic Alliance, climbed to almost 27 percent, from 24 percent.

“Since President Zuma has been in power the reform process has been almost non-existent,” said Lars Peter Nielsen, a senior money manager at Kolding, Denmark-based Global Evolution A/S, which oversees about $2.5 billion. “If we see a stronger DA, that will be very supportive for both the bonds and currency. We’ve been relatively optimistic about potential changes in South Africa after local elections.”

For a table of the latest election results, click here

Neilsen said he would consider moving from a neutral-weight position in South African assets relative to the benchmark to an overweight position if Zuma’s power were diminished and “the more market-friendly forces” in the ANC took on a bigger role.

Zuma’s ANC, widely credited with ending white-minority rule, now faces almost daily demonstrations over the failure of the government to create employment and address poverty. Nearly 27 percent of South Africa’s working-age population is without jobs and the central bank is anticipating zero growth this year, while the nation’s credit rating is at risk of being cut to junk in December. A succession of graft scandals implicating Zuma, 74, has also fueled discontent.

Low Growth

“The results are indicating that the drop in support is significant and it’s real,” said Rashaad Tayob, a portfolio manager at Cape Town-based Abax Investments, which manages $5.8 billion. “This will continue to put pressure on the ANC and Zuma in particular. It’s positive for the bond market if that happens; the issues that South Africa has been facing in the last few years in terms of low growth and very low confidence have a lot to do with the politics.”

Yields on benchmark South African government rand bonds due December 2026 rose three basis points on Friday to 8.58 percent, after falling 10 points on Thursday. The yield has tumbled 82 basis points since the beginning of June. While bonds could extend gains, the rally has made them expensive, Tayob said.

Bonds ‘Expensive’

“Unless we’re confident that the domestic issues and the ANC’s internal battles are going to have a positive resolution, unless we’re confident of that, then we think bonds are expensive here,” said Tayob, who sees value in the 2026 securities at a yield nearer 9 percent.

Rates on South Africa’s $2 billion of notes maturing in September 2025 fell six basis points to 3.88 percent after dropping 12 points on Thursday. The premium investors demand to hold the nation’s dollar debt rather than U.S. Treasuries narrowed seven basis to the lowest in over two weeks, while the cost of insuring the debt for five years using credit-default swaps fell eight basis points to 243.

The rand was also buoyed this week by expectations of low global interest rates, which should see investors seek out returns in higher-yielding emerging market economies. The Bank of England cut interest rates to a record low on Thursday and promised to buy more government and corporate bonds to support its economy against fallout from the Brexit vote. The rand is the third-best performer against the dollar, euro and pound in the world so far this year.

Stocks Decline

The rand’s rally is hurting South African stocks, headed for a third week of declines as the stronger currency weighs on companies that have foreign revenues. The FTSE/JSE Africa All Share index dropped 0.4 percent, extending losses this week to 0.9 percent. Cie Financiere Richemont SA, MTN Group Ltd. and Naspers Ltd. led the decline.

“Our share market is not really a South African share market; there are lots of companies that are in fact global companies and are not really directly related to South Africa,” said Wayne McCurrie, head of portfolio management at Momentum Wealth in Johannesburg. “The mere fact that the rand is strengthening is very negative for the rand-hedge shares.”

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