Life really is sometimes stranger than fiction.
Aficionados of the ongoing TV series “Billions” will have seen the recent episode where Bobby “Axe” Axelrod pulls his big-hitting hedge fund’s quarterly performance out of the mud by taking a punt on very large short position on the Nigerian naira. If his real life peers had done the same on the South African rand, they will have enjoyed a similar outcome. The rand could have been sold at ZAR12.31/US$ on Monday and bought back this morning at ZAR13.55 which represents a one week move of some 10%.
The really big move in the rand came overnight on the back of president Jacob Zuma firing his internationally respected finance minister Pravin Gordhan along with a bevy of other ministers in what can only be described as a night of the long knives. In order to remove Gordhan, a move which has been considered reasonably probable by markets for quite a while but which they hoped would not happen, Zuma whistled him back from London where he was busily buttering up investors. Zuma is widely reported as saying, “I have decided to make changes to the national executive in order to improve efficiency and effectiveness” which translates as “out with the thinkers, in with the puppets”. So Gordhan is replaced by Malusi Gigaba, described as “a close ally” of Zuma.
Towards the end of the Apartheid period in the late 1980s I had a South African girlfriend who had been on the embassy staff in London. She greatly favoured the dismantling of the racist regime but had warned that sooner or later the RSA would end up tumbling into the hands of an autocrat and that the economy would eventually be undermined by corruption and waste.
Some years later I visited her back home in Durban where she expressed the view that the experiences of the benighted Zimbabwe under the Mugabe regime has scared enough South Africans into remaining on the democratic path.
The long-declining trend of the rand reversed shortly after Gordhan was appointed in December 2015. It hit its low in January 2016 at ZAR16.87 since when it has gradually recovered to ZAR12.31 in Monday’s intraday trading, a 21-month high for the currency.
In the longer charts the overnight sell-off is small beer and similar short-term moves also happened within the Gordhan era, although anyone putting money on the previous one-way decline setting in again would not be totally off his or her rocker.
What chance the others?
If South Africa, the most highly developed of sub-Saharan Africa’s civil societies, is struggling with putting economic stability and the wealth of the nation ahead of its leader’s personal power trip, what chance the others?
Some years back I worked with an asset management firm which specialised in managing the sovereign wealth of a sub-Saharan country. As one former employee once told me over a quiet drink, “the central bank transfers US$1bn and all US$900m which arrive with us are duly invested. They pay lip-service to our performance but in effect the objective is achieved before a penny has been invested.” It would be fatuous to assume that to be the model for all countries but equally it would be very naive to think of it as being an exception.
I have an asset allocation meeting to attend in London next week and in a recent conference call with the CIO I promised to bone up on my emerging markets knowledge as my time has, in the past few months, been largely taken up by trying to evaluate the probable ramifications of Brexit and Trump. I think, on the back of last night’s events in Pretoria, my recommendation on exposure to Africa will now be much easier to formulate.
Not a bad time
So Q1/17 is done and dusted and for all intents and purposes it hasn’t been to bad a time for investors who have stayed the course and who have remained a calm long of risk. One of the few losers has been the Japanese equity market where the Topix lost 14.99 pts or 0.981% in today’s trading which took it to a marginal loss of –0.396% on the quarter.
The other tricky space has been and will remain the global bond market.
Bunds have been up and down like the proverbials. Although the rally from recent highs of close to 0.5% yield – nobody’s getting fat except for Mama Cass – it could be argued that the current 10-year yield of 0.33% is 50% higher than the 0.21% we set off at on January 1.
Investors’ greatest problem with Bunds and by association with most other European government bond markets going into Q2 remains that the long end is firmly in the hands of the ECB. In other words, rates will not be where demand and supply would have them, but where the ECB decides they’re going to be. Pushing against St Mario and his merry men has only ever cost money and the number of traders prepared to stand up to them is diminishing by the day. What’s that about heroes usually ending up dead?
And then there’s Malta and Brexit. The 27 have to agree on a common strategy towards Britain – or if Nicola Sturgeon has her way, England and Wales – which in normal circumstances would be a two-year process in its own right. The wisest thing they could do would be to kick off by giving the negotiating team the freedom to vary the two-year deadline. That this randomly selected timeframe has no more than a snowball in hell’s chance of being met with anything approaching a comprehensive and working long-term solution seems to be beyond reasonable doubt.
Exit terms
The discussion of whether exit terms and trade terms can be negotiated at the same time is still in the frame. Having been through a divorce myself, I can assure you that the fight over finances began before the decree nisi – the equivalent of May’s letter to Tusk – had been issued and that the sooner one gets on with it the better.
Incidentally, for the record, it took three-and-a-half years and tens of thousands of pounds of legal fees for us to sign an a agreement which was as near as dammit identical to the one I had offered at the beginning of the process.
The 27 need to have the settlement ratified by all of the sovereign parliaments and having experienced what a bunch of Walloons could do to the EU/Canada trade agreement, it could all get very nasty. Do Romanian farmers or Spanish fishermen really care what is imperative for German car makers? Unless careful, Brexit could still end up doing more damage to the 27 than to the one.
Alas, it is that time of the week again and all that remains is for me to wish you and yours a happy and peaceful weekend. Easter this year is unusually late, hence school holidays will end on Easter Monday rather than begin on Good Friday. With next week being the first of the new quarter and with many dads tied up in the office with reporting, the little kiddies will out of necessity have to be entertained at home. The warm weather followed by recent rain has given the weeds in my garden a great start. If anybody has any spare manpower – or child-power – I have a great task on offer.
This time of the year also brings the annual charity appeal to my readers. I have found great and generous support so far but if anybody would still care to make a contribution to my collection for prostate cancer research, do not hesitate to visit https://www.justgiving.com/fundraising/PBY104D. All donations welcome.