It\u2019s time for a recovery in South Africa\u2019s crushed markets.<\/p>\n
That\u2019s the view from the likes of strategists at Goldman Sachs Group Inc., Deutsche Bank AG and Credit Agricole SA, after the country\u2019s rand fell to a record low and local bonds collapsed to send yields to the highest since the pandemic struck.<\/p>\n
The calls for a turnaround are based on the country\u2019s assets looking cheap after the selloff and a slowdown in US rate hikes, rather than expectations for a sudden improvement in the economy or politics. While there\u2019s plenty of bad news, it\u2019s mostly priced in, they argue.<\/p>\n
\u201cGiven how far South African asset prices have already fallen, we think it more likely that markets will stabilize close to current levels, with moderate upside to the rand in the short term and more considerable upside to bonds \u2014 both local and external \u2014 in the medium term,\u201d said Goldman strategists including Kevin Daly, targeting 4% rand gains within three months to 18.75 per dollar.<\/p>\n
That chimes with a call just out from Credit Agricole for 18 per dollar by September. Last week, Deutsche Bank strategists, including Christian Wietoska, moved the nation\u2019s local-currency bonds to \u201cstrong overweight\u201d due to \u201cextremely cheap\u201d valuations, forecasting 10-year yields at 10%, versus over 12% currently.<\/p>\n
The calls may already be drawing investors. The rand rallied nearly 1% Friday, and South Africa\u2019s dollar bonds climbed to send yields on 2030 notes down 28 basis points, the most since November.<\/p>\n
A rand recovery to around R18 per dollar would still leave it down for the year so far. The currency crashed to a record low near R20 on Thursday and is 13% weaker in 2023, making it the worst performer among developing-nation peers after the Argentine peso.<\/p>\n
Heavy power cuts in Africa\u2019s most industrialized economy have weighed on the currency throughout the year, simultaneously fanning inflation and lowering potential growth. That\u2019s put monetary policy in a difficult position as more interest-rate hikes to stem inflation will depress already low growth.<\/p>\n
S. Africa Central Banker Chides Government on \u2018Negative Signals\u2019<\/p>\n
On top of that, geopolitics has been the latest trigger for weakness as traders assess Pretoria\u2019s relationship with Russia. President Vladimir Putin\u2019s potential visit to South Africa for a summit in August will likely keep sentiment fragile.<\/p>\n
The Goldman Sachs strategists said that while there is a risk further bad news could cause asset prices to fall more, valuations are now unusually weak, implying that the market is already discounting it. Meanwhile Credit Agricole\u2019s call is based on seeing some government action to improve the economy.<\/p>\n
\u201cFor this appreciation potential to materialise, the government would need to tackle the issue of the power outages more effectively, in order to restore market confidence,\u201d said analysts including Sebastien Barbe in a note to clients.<\/p>\n