Rand Shows a Little Local Strife Can’t Derail Emerging GainsBy
Buying South Africa’s currency reaps rewards for investors
Carry return this quarter more than twice closest rival
For evidence that fundamentals hardly matter in today’s world of easy money, look no further than the rand.
In a quarter marked by a political feud between South Africa’s president and his finance minister, stagnant growth and mounting concern that the country may lose its investment-level credit status, the rand returned 11 percent for investors selling the dollar to chase higher yields -- more than twice as much as its next-best peer. It received a further boost in the past two days as the Federal Reserve and Bank of Japan maintained a commitment to loose monetary policies to boost their struggling economies.
The pace of gains means that all but one forecaster predict it will weaken by year-end, even though the median estimate has been strengthening all year. HSBC Holdings Plc, Europe’s biggest bank, is breaking ranks, predicting the rand will appreciate 4 percent by year-end and the same amount in 2017.
“We think that the direction is actually the right one,” said Murat Toprak, HSBC’s London-based head of currency strategy for emerging markets in Europe, the Middle East and Africa. “The political situation is an important element, but usually it tends to have a big but a temporary negative impact. The second-most important thing is the global factors, which are supportive.”
While the rand is the best example of an emerging-market asset benefiting from global money flows, it’s not the only one. Exchange-traded stock and bond funds registered $20.5 billion of uninterrupted inflows in the past 16 weeks as shares from Johannesburg to Istanbul gained and currencies rallied. The MSCI Emerging Markets Currency Index is up 1.1 percent this month and 2.1 percent since the end of June, heading for a third straight quarterly gain.
Morgan Stanley and Goldman Sachs Group Inc. said in the past week that developing countries have stronger economies than they did during the so-called 2013 taper tantrum, putting them on a better footing to withstand an eventual move away from ultra-loose monetary policy.
The rand is facing local headwinds. South Africa’s economy is forecast to grow just 0.4 percent this year after barely avoiding a recession, according to the central bank. While the current-account deficit narrowed in the second quarter, reducing the rand’s vulnerability, the trade surplus underlying that data probably won’t be sustained in the second half, central bank Governor Lesetja Kganyago said Thursday. The rand remains vulnerable to a credit-rating downgrade, he said.
The rand has comfortably negotiated those obstacles since June and regained all the losses that followed late-August speculation that Finance Minister Pravin Gordhan may be removed from his post. It has climbed 7.8 percent this month, the most out of 31 major currencies tracked by Bloomberg. The central bank on Thursday left its benchmark interest rate unchanged, maintaining the rand’s yield advantage over the dollar.
“South Africa did itself a significant injustice with all of the political rumors, which really put the rand on the back foot,” said William van Rijn, a currency trader at Nedbank Group Ltd. in Johannesburg. “It was a comfortable trade for a significant period of time on the risk-off scenario” and is now returning to that position, he said. As long as the Fed keeps rates unchanged, “we can see a continuation of the current price action,” he said.
Forecasters expect the rand to weaken to 14.75 per dollar by year-end, from 13.66 as of 6:06 a.m. in London on Friday, though that prediction is stronger than the 16.70 estimate in February.
While currency traders pay a premium for options hedging against rand losses, prices suggest they’ve become less bearish as it became clear the Fed would hold rates beyond September. The extra cost for contracts to sell the currency in three months over those to buy has narrowed to 3.5 percentage points, from a seven-month high of 4.1 percentage points on Aug. 31, data compiled by Bloomberg show.
Threats remain to the currency from the potential ratings downgrade. S&P Global Ratings Ltd. and Fitch Ratings Ltd., which both have South Africa at the lowest investment level, are reviewing their assessments in December, increasing the risks of holding the country’s debt.
“At some point, there’s going to be a reversal of the current enthusiasm toward the rand,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ in London, which ranked second in a Bloomberg survey of forecasters for the previous quarter. “As the Fed starts to resume rate hikes, the focus will shift back toward the negative fundamentals.”
Those factors aren’t deterring investors. Foreigners have bought 19.4 billion rand of South African bonds this quarter, bringing inflows this year to 60.8 billion rand, compared with 5.6 billion rand in the corresponding period in 2015.
“So many negatives have been priced in that it’s normal that it corrects in a big way or tends to outperform,” HSBC’s Toprak said. “Usually, it tends to underperform when you have a sell off and it tends to outperform when you have a rally. This is the nature of the South African rand.”