Was the recent rally in South African stocks and bonds another round of Ramaphoria?
Not necessarily, says Nolan Wapenaar, co-chief investment officer and head of fixed income at Anchor Capital.
Speaking at a media roundtable on Thursday, Wapenaar said the initial strengthening of the rand and the JSE was a “relief rally” when a government of national unity (GNU) was announced.
“The ‘good guys’ got into power and the rally was done very quickly with a big bounce in the rand. Then reality sets in and we’re saying: ‘Now what?”
The key question is whether the stronger stock market and rand are reminiscent of 2018 when financial asset prices shot up after President Cyril Ramaphosa was elected president, he says. The occurrence was dubbed ‘Ramphoria’.
“In 2018, it was very exciting for a month, and then all the prices went back down again,” says Wapenaar.
Not another Ramaphoria
But he believes things are now different. “We’re going into this year with asset prices vastly lower than it was with Ramaphoria. So you’re starting from a better base and it gives you more sustainable upside.”
Thursday saw the JSE close at 81 155, a few points shy from its all-time high recorded on 18 June on the back of optimism about the GNU, while the rand traded at R18.27 just before 7pm.
In the first few days after the announcement of the GNU, the rand also surged, but weakened again as the cabinet announcement was delayed repeatedly.
“A quarter ago, we said we think the seeds of positivity in SA equity are brewing. Since then we’ve had the election and we hoped things would get better, and the election outcome reinforces that view. The difference is a couple of things are incrementally moving in the right direction and that feeds through into all of our asset classes.”
Wapenaar believes the rand is currently strengthening on good news. “But I’m not in the camp of [it trading at R17.50]. It should trade a bit stronger than R18.50, and could push R18.20.”
Rate cuts in the US could be rand-supportive, but what happens in the elections in November will set the global tone for the next five years, he adds.
A Trump presidency
A re-election of Donald Trump as US president may mean the Federal Reserve will not have scope to cut interest rates at all.
The consensus among analysts and asset managers is that Trump will beat the incumbent president Joe Biden in the presidential race, following his weak performance in the debate on Thursday 27 June, which saw Trump widen his lead in the polls.
A Trump presidency is expected to introduce new inflationary pressures in the US economy.
He has already promised to raise import tariffs to boost domestic production and implement tax cuts, which would lead to higher inflation and possibly slower economic growth, says Henry Biddlecombe, head of asset management at AG Capital, the hedge fund arm of the Anchor Group.
“We’re in a situation where the Federal Reserve is only just getting inflation under control, with the rate sitting at 5% and the market is expecting rates to trend downward from here.
“At the beginning of the year, there was talk of more than one rate cut. Fast forward to July and now they’re communicating one rate cut by September,” says Biddlecombe.
With a Trump presidency, the Federal Reserve may not have scope to cut rates at all, because of the upside risk to inflation.
“What this means is the Fed might pause its easing cycle. It’s not to say interest rates might necessarily go higher, but they may well stay at this level for longer than people expect.”
US equity markets
Biddlecombe is of the view that the US equity market is not pricing in this possibility.
He believes the US market is expensive. “In 1999, it was the most expensive it ever was – [it] was at 24.5 times forward earnings. Today we sit at 22.5 times forward earnings. So, it’s an expensive market.
“Are you being paid to take the risk in US equities right now? I suppose it’s debatable. In my view, you are not.”
Biddlecombe is of the view that should inflation start to increase again, it may precipitate a negative reaction in US equity markets. – moneyweb.coza
