Reaction to election outcome will be watched by ratings agency, says Old Mutual Investment Group
This is according to Rian le Roux, Chief Economics at Old Mutual Investment Group, who reiterates the fact that the issues highlighted by the ratings agencies include the need for the National Development Plan implementation and growth enhancing reform and fiscal discipline. “The outcome of the election will provide the rating agencies with an indication of the likelihood of government delivering on these requirements. In the wake of the elections, markets will closely monitor whether government accelerates growth-friendly reforms or not.”
|Rian le Roux|
Le Roux highlights that, given foreigners’ large holdings of South African assets, the country simply cannot afford to create a perception that either monetary or fiscal policy will steer away from conservatism. “This will weaken the Rand considerably and cause more macro-economic pain.”
He adds that likewise, a more decisive move towards addressing the ratings agencies’ concerns from Government will be positively received by both ratings agencies and investors, and could see the currency strengthen further along with the local bond and equity market.
Tucker says that while the market doesn’t appear too concerned about the risk of a downgrade in the past months, it remains largely priced for such an event. “Based on the election outcome, the South African rand, local bond market and portions of the equity market sensitive to such variables – such as banks – may experience volatility. However, on the positive side, the local equity market has many companies with a strong global footprint. Therefore any weakness that may be observed in the rand should benefit those counters.”
When it comes to the positioning in the Old Mutual Balanced Fund, Tucker explains the Fund continues to be cautiously positioned on risk assets given the uncertain global macro-economic environment. “Global growth remains uncertain and global inflation stubbornly continues to persist at current low levels, which means that central banks are unlikely to hike interest rates in the foreseeable future. This environment benefits emerging markets, as investors search for yield, and we have seen this is the recent strength in the Rand and the local bond market. The fund has been increasing its exposure to this theme, but maintains a significant exposure to global assets, should markets enter another bout of risk aversion, be it locally specific or global in nature.”