CM Trading assesses current state of SA markets
Market sentiment towards SA remains tentatively positive, but immediate policy priorities are key to addressing economic challenges like slow growth and joblessness.
The questions that are probably top of mind for a multitude of foreign investors are: ‘Why SA and why now?’
One could be forgiven for being unsure of the answer.
It is no secret that SA's markets have been in a state of flux. In his first State of the Nation address, delivered in 2018, President Cyril Ramaphosa promised “a major push this year to encourage significant investment in the economy”. Pivotal to this push, foreign investment from both firms and individual investors outside of our borders was necessary. But taking into account the dismal financial results reported by Moody’s in Q1 2019, will Ramaphosa be able to make the necessary changes and reforms to help economic growth accelerate to as high as 3% by 2022?
According to the group, in a macro-analysis released at the beginning of June 2019, the odds that SA may experience a technical recession are high. This can be attributed in large part to the widespread power outages experienced so far this year, which have had substantial negative ripple effects, particularly for the mining and manufacturing sectors.
The task of resuscitating SA’s economy is certainly an onerous one. Now is the time to dig deep as a country and harness all available resources. But it isn’t all doom and gloom on the investment front. With the recent ANC election win, under the leadership of Ramaphosa, hopes are high for renewed reforms that could potentially tackle the unemployment rate and provide a re-energised push to ignite growth.
While financial markets are generally positive towards SA at the moment, an underlying sentiment that seems to be weighing on investors is whether government can effectively address the Eskom issue. After more than a decade of increasingly slow growth, and an exponential rise in joblessness, immediate policy priorities from Ramaphosa are a crucial first step to addressing SA’s complex economic challenges.
So, the questions still remain: Why SA and why now?
The outcome of the election has been in line with market expectations, and sentiment towards South African markets remains tentatively positive. The announcement of a smaller, reshuffled Cabinet is also bound to alter our economic course. Add to that Moody’s decision to skip the much-anticipated assessment of SA’s sovereign credit rating until November 2019, and it seems that for now, South African markets have been granted a reprieve, albeit a small one.
The rand is expected to weaken over the next few weeks both in terms of the USD and the pound rate, but the dominant position of the South African economy on the African continent, and the liquidity of the rand on international markets, still make the ZAR the currency of choice for investors seeking African exposure.
Although things look precarious, investors shouldn’t throw in the towel just yet. A look at analysts’ consensus forecasts (according to Thomson Reuters) on individual shares (based only on price forecasts, ie excluding dividends and adjusted according to their weight in the index) in the FTSE/JSE Top40, shows that analysts still expect the Top40 Index to be trading 21.6% higher from current levels (48 465 as at 28 May 2019).
As the famous John Templeton said: “Bull markets are born on pessimism, grown on scepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is often the best time to buy, and the time of maximum optimism is often the best time to sell.”
CM Trading is “Your local international broker” and is a leading provider of derivative trading solutions to the local and international market. The company, regulated by the South African Financial Services Board, operates successfully around the globe and assists in increasing their clients trading knowledge, providing personal service and support as well as a range of online solutions to match every traders needs.
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