The first week in April marked the end of a quarter dogged by uncertainty and a stronger rand in local currency and equity markets. Now that the Iraqi war is under way, some analysts are warning against overestimating its impact.
‘People are overplaying the war,” said Dermot Quinn, currency trader at ABN Amro. ‘The United States is at war probably because of the state of its markets and social mood. Markets are not what they are because of the war.”
Quinn notes that although the rand has strengthened by between 30% and 40% against the dollar over the past year, one should focus on its performance against a currency basket of key trading partners — it has appreciated 20% against the euro.
The rand has relatively better yields, offering an inflation-adjusted 4% for suitably sized deposits, compared with yields of 1% in the US. Over the coming quarter, Quinn expects rand strength to diminish and sees the currency trading at between R8,25 and R8,50 to the dollar. This is because the Reserve Bank will continue to buy some incoming dollars, as it admitted after its monetary policy meeting.
Expected interest rate cuts will also reduce the yield on South African assets, leading offshore funds to cut their holdings. Finally, the drop in export volumes as a result of the strengthening rand, and the relative strengthening of imports, will reduce foreign exchange earnings.
Bonds were the place to be this quarter. Jonathan Myerson, bond analyst at HSBC Securities, notes that ‘any indication of a long war [leads] to a sell-off from equities into bonds”. In troubled times, bonds are seen as a safe haven because of their low risk.
The two key South African bonds shone this quarter. The R150, maturing in 2005, offered returns of 2,95% over the quarter, with a yield of 11,05% at Thursday lunchtime. The R153, maturing in 2010, offered 5,41% with a yield of 10,24%.
During the past quarter, the yield on the US Treasury Bill touched a 44-year low of 3,56% on March 11, nine days before the war began. The lower the yield, the higher the price on a bond.
Myerson said the local bond market still expected three rate cuts and declining inflation this year. The bond market’s gain has been the equity market’s loss. The Top 40 index shed 18%. The biggest loser was information technology, which has been bleeding for two years and shed 30%. The newly listed Telkom bumped Didata out of the Top 40.
The stronger rand was reflected by a gold index shedding 27,5%, and the overall resource falling 17,4 %. The London FTSE is 6,5 % down for the year, while Germany’s DAX has lost 15%. The US has seen mood-lifting rallies interspersed with loss-making sessions. The Dow Jones has lost 3,3 %, while the tech-laden Nasdaq rose 1% over the quarter.