South Africa’s economy has seen a record low in the value of the rand, bringing local bonds to their highest yield since the pandemic began. However, experts suggest that the country’s assets appear ‘cheap’ following this selloff and that a recovery could soon be around the corner. This comes as there is a slowdown in US rate hikes rather than as a result of any improvement to South Africa’s economy or politics. Building on this point, markets are stabilising and there may be moderate upside for the rand in the short term, with more considerable upside for bonds, both local and external, in the medium term.
Goldman Sachs strategists have gone on to suggest that the current decline in asset prices has gone far enough and with moderate upside expected, are targeting a 4% rise within the next three months. Credit Agricole, meantime, predicts an 18% rise by September. Deutsche Bank strategists have also predicted an increase in the value of South African local-currency bonds due to their “extremely cheap” value and low valuations, forecasting 10-year yields at 10% compared to the current 12%.
However, there are some challenges that must be addressed to ensure a stable future for the country’s assets, including heavy power cuts in South Africa’s largest industrialized economy. Such an economic environment invites low potential growth and inflates inflation rates, putting monetary policy in a difficult position. As more interest rate hikes are required to combat inflation, already low growth rates could plummet further.
Moreover, Russia’s recent geopolitical developments weigh heavily on the outlook for South Africa’s markets. An August visit by President Putin will most likely impact investor sentiment negatively, given prevailing uncertainties regarding the two countries’ relationship.
Throughout these challenges, the market continues to discount South Africa’s economy and politics, and experts forecast a recovery on the horizon, but only one based on stabilising the country’s assets. Possible avenues to achieve such stability include addressing power outages in a more effective way and introducing government policies to bolster economic growth. As valuations continue to be weak, it is important to recognise that the recovery will take time, and whilst the government and the economy can take some solace in global experts’ optimism, there is still a long road ahead.
