Will he stay or will he go?
As leaders of South Africa’s ruling party prepare to discuss a potential ouster of President Jacob Zuma, investors are turning bullish on the country’s currency. Societe Generale SA, Credit Agricole SA and Citigroup Inc. are betting on a resurgence in the rand, which has lost 4 percent of its value since he sparked a crisis with a Cabinet reshuffle.
Just talk that Zuma may be removed by the African National Congress has increased the appeal of the nation’s assets, according to SocGen strategists Jason Daw and Phoenix Kalen, who recommend selling the dollar for the rand and buying longer-dated bonds. The currency surged to a one-month high on Wednesday as debt yields dropped to two-month lows.
Opposition to Zuma’s rule has mounted within the ANC’s ranks following his March 31 decision to fire Pravin Gordhan as finance minister, a move that prompted S&P Global Ratings and Fitch Ratings Ltd. to downgrade the nation to junk. The party’s leadership will discuss Zuma’s future from Friday, according to two senior party officials who will be in attendance.
“The chances of Zuma being ousted are slim, but the fact that some members of the National Executive Committee are openly discussing the possibility has boosted sentiment toward South African assets,” the SocGen strategists wrote in a note on Wednesday. “A bullish stance on South Africa remains one of our highest conviction views.”
With the political crisis moving toward closure, signs of an economic recovery are also supporting the rand, said Guillaume Tresca, an emerging-market strategist at Credit Agricole who also recommends going short-dollar versus the rand, targeting a move to 12 rand against the greenback. Zuma’s removal would add impetus to the currency’s gains after it slumped 10 percent in the wake of Gordhan’s dismissal and the credit-rating downgrades in April.
“The potential dismissal of President Zuma from the ANC is not fully priced in,” Tresca said. “It is not yet a done deal but any moves that put pressure on President Zuma will be seen positively by the markets.”
South Africa’s inflation rate fell to its lowest this year in April and will probably stay within the central bank’s target range, leaving room for policy-easing by the end of the year, Tresca said. Firmer borrowing costs and market liquidity make the rand an attractive proposition for carry trade, enabling the investment of borrowed dollars in higher-yielding currencies, he said.
The rand gained 0.4 percent to 13.0276 per dollar by 11:52 a.m. in Johannesburg, after strengthening 1.1 percent Tuesday, as Bloomberg reported the ANC leadership may discuss Zuma’s ouster. Yields on benchmark government bonds due 2026 dropped five basis points to 8.51 percent. Foreign investors bought a net 3.65 billion rand ($280 million) of South African bonds Tuesday, the biggest inflow since April 5.
Not all market participants agree. There is little chance of Zuma leaving office any time soon and a downgrade of China’s debt rating may affect prices for South Africa’s raw material exports, Morgan Stanley analysts said in a note. Investors should be wary of “chasing the rally” in the rand, they said.
Even if Zuma stays in office until 2019, when his term expires, signals of dissent within the ANC will continue to support South African assets, according to Citigroup strategists led by Luis Costa, who recommended Wednesday buying and writing dollar-rand put options, seeking to profit from a weakness in the U.S. currency.
“It is still our base assumption that Zuma will stay the president of South Africa until 2019, but further signals of dissent within the ANC may warm up the Zuma trade once again,” the Citigroup strategists wrote. With low rates in developed nations driving money to emerging-market assets, the rand’s “typical high beta should see it outperform many a peer,” they wrote.