Money flooding into South Africa, Interest Rate cuts Coming Closer

Money flooding into South Africa, Interest Rate cuts Coming Closer

Author

Jurie de Kock
June 28, 2024

Money flooding into South Africa, Interest Rate cuts Coming Closer

Earlier this week, Old Mutual Wealth was featured in the Daily Investor, where chief investment strategist Izak Odendaal shared his thoughts on the latest strong offshore flows into the local SA Bond market and where we believe interest rate cuts in SA may come sooner than many think.  

Money flooding into South Africa

Shaun Jacobs • 25 June 2024

Investors are pumping money into South African assets, with JSE indices and government bonds experiencing significant rallies in the past week. It is due to optimism surrounding the formation of a Government of National Unity (GNU). 

This is feedback from Old Mutual Wealth investment strategist Izak Odendaal, who explained that this rally may be longer-lasting than Ramaphoria five years ago. 

Odendaal cautioned that the newly inaugurated GNU under President Cyril Ramaphosa will not solve most of the country’s problems. However, it can address a handful of big blockages that hinder economic growth. 

It has also placed adherence to the Constitution at the centre of its agreement and professionalising the public service.

The question remains whether it will be able to encourage investors and entrepreneurs to risk capital in search of better long-term returns. 

We’ve already seen the positive impact of private sector participation on electricity supply – three months have passed without load-shedding.  This doesn’t mean load-shedding is gone for good, but it is unlikely to return to anything near the dire levels we saw in 2022 and 2023. 

Progress is also being made at Transnet, and its current leadership is encouragingly aligned with government policy to boost private-sector participation. 

The penny seems to have dropped that if the government includes, rather than excludes, the private sector in infrastructure provision, there is better infrastructure and considerable investment spending. 

These green shoots, coupled with optimism surrounding the GNU, have resulted in a strong rally in South African assets, as shown in the graph below.

This rally will likely continue with Bank of America’s latest fund manager survey showing that 59% of managers are bullish on equities despite the ongoing uncertainty surrounding the GNU talks.

71% of managers are optimistic about equities for the next three to five years. Moreover, 82% are likely to bring back offshore funds if domestic returns look superior.

Not a false dawn

Odendaal said that while there have been false dawns before, this time, there is a sense that things will be different, considering the steep decline in ANC support and the progress of reforms. 

The period of “Ramaphoria” when Jacob Zuma was replaced as state president by Cyril Ramaphosa in 2018 did not last very long, despite the flowery rhetoric of a “New Dawn” and “Thuma Mina” (Send Me). 

This is partly because global market conditions turned unfavourable and partly because Ramaphosa struggled to get a grip on his divided party. 

The biggest reason is probably because the depth of destruction during the Zuma era was much worse than most people initially realised.

Key institutions from SARS to the NPA were gutted, while SOEs were saddled with unsustainable debt and riddled with corruption. 

Cleaning up this mess took time and met considerable resistance; unfortunately, there was collateral damage.  For instance, the emphasis on improved maintenance at Eskom after 2018 meant that load-shedding was worse under Ramaphosa than under Zuma, hobbling the economy. 

As noted earlier, the 2024 New Dawn is different because key reforms are already underway. The new government must keep its foot on the accelerator and not hit the brakes. 

But no one should be unrealistic. If everything were easy, it would have been done by now. There will be disagreements among GNU members along the way.  

When investments are cheap, people are tempted to wait until a clear catalyst will unlock the value. 

The catalyst is usually unpredictable. This means that a valuation-based investment process requires persistence. 

Just when South African investors grew tired of hearing about being patient, we seemingly had a pro-growth GNU that was not the consensus view ahead of the election. 

This might be the catalyst to spark a long-term rally in South Africa’s capital markets. 

Rand rallies as Mbalula says GNU deal is close

"Almost done with GNU discussions, in the best interest of all South Africans," ANC Secretary-General Fikile Mbalula said in a post on X. "It will be done as promised."

Mbalula's statement coincided with Bank of America strategists saying they've closed their bearish trade recommendation for the currency as they anticipate the ANC and the centrist Democratic Alliance will form a coalition government.

Cape Town intends to spend R39,5 billion on infrastructure from July 2024 to June 2027, as approved in its ‘Building For Jobs’ Budget.

This is South Africa’s largest three-year infrastructure investment by a metropolitan municipality.

For the full article, click on this link;  

Good news about big petrol price cuts and interest rates

South Africa is set for big petrol price cuts in July despite the slight rand weakening compared to May. This adds to the downward pressure on inflation and interest rates. 

At the beginning of June, all fuel grades were slashed, with petrol dropping by R1.24 per litre and diesel cut by between R1.09 and R1.19 per litre. 

Petrol prices are expected to drop by just over R1 per litre, and diesel by a little more than 30 cents.

For the full article, click on this link;  

Friday Food For Thought