President Jacob Zuma’s recent Finance Minister changes are disconcerting to say the least, which is reflected in the Rand’s rapid weakness last week and now some retracement. Clearly these rash changes will question the fiscal discipline and stability of the country. However, the positive aspect is the re-appointment of Pravin Gordhan which shows that some sense must be prevailing in senior ANC ranks who are able to influence Mr Zuma to appoint someone more credible than his initial choice (David Van Rooyen). But this could be the “tipping-point” for a change in leadership.
For financial markets, our low debt rating could be further under threat, which would have a negative effect on the cost of lending. This would drive bond rates up and raise most borrowing costs, which would further slow the economy down. Our view is that despite these new risks, the Rand’s significant weakness is discounting these negative influences. The Rand is now 46% above purchasing power parity, which is close to an all-time high and not sustainable. We believe the Rand should stabilise and then start retracting its under-valued position into 2016. Valuation-wise, the consumer related sectors are likely to take the most pain. In addition the listed property sector should also continue to underperform off its high base as inflationary pressures and the risk of rising interest rates negatively affect the sector. Our recommended portfolios have minor positions in these sectors.
The Finance Minister changes have clearly highlighted the strain on government spending funds. A major risk is an increase in taxation, which we believe is likely in 2016. The focus would be more on the wealthy with individual and capital gain tax rises.
