Johannesburg - The “flash crash” of the pound on Friday and its continued decline on Monday has caused some JSE-listed companies with UK exposure to drop in price, according to analysts.
Kirk Swart and Brett Birkenstock, analysts at Overberg Asset Management, said yesterday that the companies which earn some, if not all their revenues in Britain, would now earn less pounds for each rand. They said companies such as Capco, Mediclinic, Discovery, Reinet, and Brait had all de-rated.
The rand firmed to R17.05 against the pound by 5pm yesterday. The pound depreciated 4.2 percent on Friday, its worst performance since June 24 when Britons voted to leave the EU, sending shockwaves through global markets and wiping trillions off valuations. It hit 31-year lows against the dollar at $1.1841 - its lowest since mid-1985, before rebounding to around $1.2450.
Dave Mohr and Izak Odendaal, multi-managers at Old Mutual, said it remained unclear whether a technical glitch or human error was behind the Friday slump, but the pound had already been falling for most of the week after Prime Minister Theresa May outlined her government’s intentions regarding Britains future relationship with the EU.
The rand is on the verge of bucking a five-year losing trend. Instead of holding a trajectory that has seen it lose more than 50 percent of its value against the dollar since 2011, the currency may be about to end a pattern of annual declines, according to Informa Global Markets, which analyses technical trends.
The most-accurate rand forecasters support the view that the rand will continue to benefit from the global clamour for yield. The rand will weaken to R14.56 to the dollar by year-end, according to the median of analysts surveyed by Bloomberg. Swissquote Bank sees the rand at R13.50 to the dollar.
Shortfalls
The rand’s five-year decline has tracked the blow weaker metals prices have dealt to South Africa’s commodity-reliant economy.
Persistent shortfalls in South Africa’s current account have made its currency vulnerable to shifting global investor sentiment, as flows from foreign buying and selling of South African assets played an exaggerated role in the absence of more robust trade. The currency slumped to a record R17.9169 to the dollar on January 11 as investors fretted over slowing growth in China.
Since then, the rand has advanced 22 percent to be the biggest gainer in the world after Brazil’s real. That has included three attempts in August and September to break the dollar’s five-year support trend-line. If the technical indicator is breached, the rand could strengthen to the 12-to-the-dollar levels last seen a year ago, according to Informa Global Markets.
“The trendline is under attack,” said Kamran Sheikh, a London-based technical analyst at IGM. “We have not yet seen any significant rebound from the recent lows near the trendline. Basically, we are witnessing a correction of the entire 2011-2016 bull run for the dollar against the rand, so we have ample room for further downside.”
The multi-year trendline drawn from the currency’s 2011 low was at R13.3315 to the dollar by the end of last week. Further strengthening in the rand would vindicate the Reserve Bank’s view that it could be near the end of its interest-rate hiking cycle. The central bank has left borrowing costs unchanged at its last three meetings.
Inflation in August was the lowest it has been in 2016, dropping into the Reserve Bank’s 3 percent to 6 percent target range.
- Additional reporting by Bloomberg
BUSINESS REPORT