Coronavirus, Moody’s and recession – what this means for the rand

 ·9 Mar 2020
South Africa Rand Money Notes Coins

The coronavirus outbreak has rapidly approached global pandemic levels, and given the knock-on effects of the virus on economic growth, the fireworks in markets were inevitable, says George Herman, director and chief investment officer at Wealth Management firm, Citadel.

From sitting at record highs, global markets sold off aggressively during the last week of February, with most equity markets dropping around 10%, erasing the gains of January and early February.

US Treasury yields plummeted to all-time lows as investors raced for safe haven assets, while oil, energy and consumer-facing stocks were pummelled as growth mark-downs filtered through the system.

And for local markets, emerging market stocks and currencies have not been able to avoid the contagion, with the rand plummeting, along with the JSE All Share Index.

Bloomberg noted on Monday that oil prices are crashing, stocks are plunging and anxiety over the coronavirus is mounting.

“This is starting to look like it could be one of those turning points that marks a generation of investors, like the bursting of the internet bubble in 2000 or the financial crisis in 2008-2009, it said.

In Morning trade on Monday, the local unit surrendered more than 3% against the greenback:

  • Dollar/Rand: R16.14  (3.13%)
  • Pound/Rand: R21.26  (4.23%)
  • Euro/Rand: R18.47  (4.69%)

The JSE, like global markets, was also under pressure, down nearly 6% to 48,988 points.

“The reason that so many investors may be feeling particularly anxious about this latest bout of turbulence is because we haven’t experienced normal, meaningful, cyclical retracements for the past decade, as central banks have continuously flooded markets with free cash,” said Herman.

“Even now, central banks are poised to step in and bolster the global economy, as evident by the US Federal Reserve’s emerging 50bps cut earlier this week.

“The trouble with this is that the marginal efficacy of monetary stimulation has declined over time. Additionally, no amount of monetary or fiscal stimulation can solve a virological and logistical problem,” he said.

Citadel noted that trade and travel bans have significantly disrupted supply chains, and while these challenges will eventually be resolved, global economic growth has been dealt a severe body blow, and is unlikely to achieve the growth levels anticipated at the onset of the year.

MSCI All Country World US$ Index (01 March 2017 – 4 March 2020)

JSE All Share Index (01 March 2017 – 4 March 2020


What’s next for SA investors?

Within the context of the last 12 months, the current sell-off in global equities and on the JSE is sizable, said Herman.

“Again, however, these movements are not at all out of character for risk markets, as demonstrated by the graphs below depicting the MSCI All Country World Index and JSE ALSI’s performance over the past three years. In fact, this scare in the markets has removed a great deal of froth, and returned risk markets to much fairer valuations.

“However, the deterioration of South Africa’s fiscal metrics has been a source of concern for the past few years and, as a result, at Citadel we have gradually decreased our holdings in bonds in line with the country’s credit rating,” he said.

Additionally, Herman said that the twin-deficit, together with South Africa’s politically-constrained growth potential, has kept Citadel negative on the rand.

“Examining the rand’s movements from the past five years, as seen in the graph below, even at R15.80/$ the local currency does not yet appear oversold against its long-term dynamics.”

Rand volatility over the past five years

Should the latest hair-raising GDP figures – which showed that South Africa entered a technical recession in the last quarter of 2019 – finally cause Moody’s to react in March and downgrade South Africa’s credit rating to sub-investment grade, Citadel said it expects the rand to show a flow-induced deterioration, briefly heading north of R17.00 against the dollar.

“This would likely be followed by some consolidation soon after, where new speculative money would be attracted by some of the highest yields in the world,” Herman said.

“But if Moody’s again resists reacting to whatever bad news is thrown at it and keeps postponing the obvious, the rand will continue to mark time in tune with global developments until the next ratings guillotine-moment in November.

“Volatility will thus remain with us in South Africa long after the world has come to terms with Covid-19,” he said.

Rating agency Moody’s has cut South Africa’s growth forecast from 0.7% to 0.4% for 2020, on the back of the global coronavirus outbreak.

“The global spread of the coronavirus is resulting in simultaneous supply and demand shocks,” Moody’s said in a global research report late last week.

This, in turn, will impact South Africa’s growth prospects, it said.

Read: Rand collapses against the dollar as coronavirus sends markets into a panic

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