Bleak 2016 for markets in wake of Nhlanhla Nene’s removal

Posted On Friday, 11 December 2015 00:02 Published by
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President Zuma surprised markets on Wednesday evening by recalling South Africa’s well-respected Finance Minister, Nhlanhla Nene, and appointing David van Rooyen, an ANC veteran, as the head of National Treasury.  

The Rand responded to this announcement by plunging from R14.60/US$ before the announcement to an all-time low of R15.38/US$ before settling around R15.00/US$ on international markets on Thursday.  The Rand’s reaction is essentially a proxy for the response of analysts and investors, and captures the extent to which Zuma’s decision shocked – or, at the very least, surprised – and disappointed market participants.

In his statement, Zuma said: “I have decided to remove Mr Nhlanhla Nene as Minister of Finance, ahead of his deployment to another strategic position.  Mr Nene has done well since his appointment as Minister of Finance during a difficult economic climate.”  Although Zuma said that Nene is to be redeployed to another “strategic position”, to be announced in due course, this is little more than a token nod in the direction of policy stability and continuity.  More concerning is that Zuma did not give any reasons for Nene’s removal.  Reading between the lines, Zuma’s decision to recall Nene follows a controversial announcement by National Treasury to reject proposed changes to a deal between national airline SAA and aircraft manufacturer Airbus as well as delays in the decision on the financing of SA’s investment in the energy cluster, especially spending on the proposed nuclear energy programme. 

Nene’s successor, David van Rooyen has served as whip of the standing committee for finance and whip for the economic transformation cluster.  He is a former Umkhonto we Sizwe operative, and has held various leadership positions in Congress of South African Students, the United Democratic Front and the National Union of Mineworkers.  He is a former Executive Mayor of Merafong Municipality and a former North West provincial chairperson of the South African Local Government Association. 

Zuma’s decision is concerning at a number of levels.  First, it follows last week's credit rating downgrade by ratings agency Fitch and S&P’s ratings outlook revision to negative (from stable) and comes a week before the Federal Reserve meeting of 15-16 December when US Federal Reserve Chairwoman Janet Yellen is widely anticipated to raise US short-term interest rates for the first time in a decade.  If there can be such a thing as a bad time to surprise markets, it would be now. 

Second, Zuma’s decision to remove Nene will keep the Rand under pressure and further challenge weak investor sentiment.  Third, given the relative openness of the SA economy, the weaker Rand can be expected to translate into higher consumer price inflation as a consequence of the pass-through of imported price inflation.  Together, these factors are likely to cause higher bond yields, which will undermine fiscal stability and, if anything, point to a ratings downgrade in foreign currency debt to sub-investment grade in 2016.  

If there is any silver lining to this dark cloud, it comes in the form of the temporary relief that the rand blowout may give to South Africa’s beleaguered commodity export sector.  However, given the well-known infrastructural constraints, especially the energy and skills deficits, it is unlikely that the rand weakness will assist other parts of the economy, such as the manufacturing export sector.   

Zuma’s action reinforces the view that domestic and foreign investors are rapidly becoming significantly and structurally more bearish on South Africa.  This is unlikely to change until some sense of policy direction is created by the new finance minister and the first real opportunity to assess this will come in the upcoming February budget presentation. 

Shocks are nothing new to financial markets.  In 2013, we witnessed the “taper tantrum” when the US Federal Reserve turned off (or, rather, tapered) one of their quantitative easing programmes.  Trimming the flow of funds into capital markets created widespread panic and a market selloff.  In 2014, a switch from “risk on” to “risk off”, saw a similar market slump.  Today, it is a political move that has spooked the market.  All we can say with certainty is that the market and the environment always have the capacity to surprise and will do so again in the future. 

Given this, our investments are positioned to cater for risk as well as uncertainty – or what might also be termed unknowability.  Our investment positioning, therefore, remains unchanged despite the latest bombshell.  We believe in diversification as an effective and valuable way to hedge against different risks that investors face and the silver lining in today’s rout is that we will make no changes to our house view.  Our portfolios are already structured to withstand the buffeting by being overweight offshore, which includes overweight positions in global equity, global property and global hedge funds; overweight South African hedge funds; and overweight protected equity, which offers a valuable defensive element.

Both independent prices, such as bond yields, and the Rand exchange rate are pricing in a bleak 2016 for South Africa.  We anticipate volatile markets in 2016 with notably low returns, and our investments are well positioned to cater for this likelihood.

Last modified on Friday, 11 December 2015 09:17

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