Cape Town - Despite a new sense of optimism in South African politics, now is not the time to be complacent, Steven Schultz, head of investments at Momentum, cautioned on Monday.
In his view, Deputy President and newly elected ANC president Cyril Ramaphosa will consolidate his political power base before an early inauguration as the country's president.
Earlier in January, Momentum Investments economist Sanisha Packirisamy also pointed to the optimism the election of Ramaphosa as ANC president has brought. She did raise the question of how long that would continue to have a positive impact on the market.
This is because potential trade-offs between key policy objectives supported by the two factions in the ruling party could end up having a further negative impact on the South African economy.
In her view, higher confidence levels due to Ramaphosa's election will only be sustainable if the new leadership can rebuild trust between government and the private sector.
Bloomberg reported on Monday that Ramaphosa is increasingly flexing his political muscle to stamp out corruption and revive the country's economy. Recent changes to the board and management of Eskom are an example.
READ: Ramaphosa revives optimism in SA, but for how long?
Interest rates
At its first meeting for the year, the South African Reserve Bank's (SARB's) monetary policy committee (MPC) decided to leave the repo rate unchanged at 6.75%.
Schultz expects the SARB to cut the repo rate by no more than 0.50% over the next 12 months. In his view, this is good news for those in debt, but could be a problem for investors needing an income.
SARB governor Lesetja Kganyago said after the MPC meeting that while South Africa's economic growth outlook has become more positive, it is still fragile.
In his view, the upcoming budget in February would be key in determining any further sovereign credit downgrades. He cautioned that another credit downgrade by an international ratings agency would impact the rand and long bond yields.
Kganyago expects wage pressure to continue on inflation, but at the same time he pointed out that the outlook for household consumption expenditure has improved. It is expected to be the main driver of gross domestic product growth in the medium term.
"Equities remain the preferential asset class, supported by increasingly synchronised global growth and robust corporate earnings. SA Inc equities will be back in fashion with investors," said Schultz.
READ: SA Reserve Bank keeps repo rate unchanged
Rand performance
As for the rand, Schultz foresees that it will experience moderate depreciation in 2018 and 2019, despite improved investor sentiment, an ongoing global search for yield and stable commodity prices.
The rand firmed more than 1% on Monday as the market digested news of the new Eskom board and reports that the ANC’s Top 6 are discussing the exit of President Jacob Zuma.
These developments create more positives for the local unit ahead of the Moody’s announcement in March but it remains to be seen whether this will be enough to help the rand stay in the World Bond Index, according to TreasuryOne dealer Gerard van der Westhuizen.
By 16:30 the rand was trading 0.5% firmer at R12.10 to the dollar from its previous overnight close. It touched R12.02 to the greenback earlier in Monday's session. The rand last traded under R12.00/$ on May 24 2015.
READ: Rand flirts with R12/$ on new Eskom board, Zuma exit talk
Global trends
Schultz forecasts that the global economy will grow at 3.1% during 2018.
Among the current global trends he highlights rising international asset prices, diminishing volatility and continued robust growth.
In his view, the US Federal Reserve will likely raise interest rates three times in 2018.
"The (US) economic recovery should continue to gain traction and tax reform will see US growth accelerate to 2.5%," said Schultz.
As for China, he sees growth there declining marginally to 6.1% in 2018.
"Critics will be proven wrong, as stable levels of liquidity will persist, despite continued (Chinese) government deleveraging efforts," he said.
As for Europe, Brexit will continue to dominate the news headlines in Europe, in his view, and British Prime Minister Theresa May could even be forced to call another general election. He thinks the European Union will show economic growth of 2.1% for 2018.
Schultz foresees that a barrel of oil will cost $60 by Christmas 2018.
Tech: cryptocurrency crash?
Schultz thinks Amazon will launch officially in South Africa in 2018.
As for bitcoin, he pointed out that last year was a record year for the cryptocurrency, but he believes that a crash is coming.
"We wouldn’t put all our tokens on it though," he said.
City Press reported on Sunday that dollar prices for bitcoin last week fell below $10 000 for the first time since November 2017, before recovering slightly to around $11 000.
With prices having reached almost $20 000 in December, the bubble may technically already have burst, but the digital currency is still trading heavily at levels 10 times higher than a year ago, the Sunday paper reported.