Rand Plunge Makes South Africa a Buy for StanChart, SocGen

  • ‘Political noise’ offers opportunity to buy rand: StanChart
  • South African bonds trade cheap to fair value: SocGen

A slump sparked by concern that Finance Minister Pravin Gordhan’s job is on the line has made South African assets a buy, according to Standard Chartered Plc and Societe Generale SA.

For Standard Chartered, which has been looking to build long-rand positions, “this week’s political noise is that opportunity.” South Africa’s weak economic outlook is likely to see the central bank leave interest rates unchanged until the second quarter of 2018. With inflation falling, real rates will stay strong and help attract inflows into the nation’s bonds, the lender said.

“For the currency, this is a constructive local medium-term backdrop at a time of supportive global conditions,” Geoffrey Kendrick, emerging-market currency and global macro strategist at Standard Chartered in London, said in an e-mailed note. “We therefore recommend a tactical short dollar-rand trade.”

The rand slumped as much as 4.1 percent on Tuesday after Gordhan was summoned to appear in court on fraud charges, which he described as politically motivated. It was the latest twist in a saga that began in December when President Jacob Zuma fired then Finance Minister Nhlanhla Nene and replaced him with a little-known lawmaker. Zuma appointed Gordhan to the post four days later, giving in to pressure from the ruling African National Congress and business leaders, and has been at odds with the finance minister since then.

The rand was trading 0.5 percent weaker at 14.2945 to the dollar by 2:03 p.m. in Johannesburg, after gaining 1 percent on Wednesday when the head of the National Prosecuting Authority said he would be willing to review the decision to prosecute Gordhan. Yields on benchmark government bonds due December 2026 dropped 2 basis points to 8.9 percent after soaring 24 basis points on Tuesday.

Foreigners Sell

Foreign investors have sold 4.5 billion rand ($315 million) in bonds since Tuesday and 4.7 billion rand in South African stocks, data from the Johannesburg stock exchange show. The rand’s one-week implied volatility climbed to its highest in a month and is most pronounced among 21 emerging market peers, while the cost to insure the nation’s dollar debt for five years is second-highest in developing countries, surpassing Brazil after Tuesday.

The announcement of steps against Gordhan come as South Africa faces the prospect of credit rating downgrades in the next two months. S&P Global Ratings and Fitch Ratings Ltd., which rate South Africa one level above junk, are due to release assessments in December. A review by Moody’s Investors Service, which ranks South Africa two notches better than sub-investment grade, is expected on Nov. 25.

The risk of a downgrade and increased policy uncertainty “are largely discounted by the market and South African bonds trade cheap to fair value,” Regis Chatellier, a London-based emerging-market strategist at Societe Generale, said in a note on Thursday. SocGen has upgraded South African bonds to “slight overweight,” he said.

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