South Africa has been subject to a period of political uncertainty. Last night, President Jacob Zuma announced a number of Cabinet changes. Although this had been anticipated, the changes were more extensive than expected.
The markets have reacted negatively since the previous Minister of Finance, Pravin Gordhan and his Deputy Minister, Mcebisi Jonas were called back from the UK on Monday. The rand was trading below R12.40 on Monday and weakened to just higher than R13.50 to the dollar this morning. The 10-year (R186) bond yield has moved from a low of 8.25% to touch a high of 9% this morning.
Given events, people might view the move in the currency market as relatively modest. However, this is happening in an environment where emerging markets are generally in favour and foreign investor flows into emerging markets have increased.
We expect the financial markets will take some time to interpret the full implications of the political changes. The credit ratings agencies will probably become increasingly concerned about the South African government's ability to stick to its expenditure targets and to collect budgeted tax revenue in a weak economic environment. It is very likely that we will see further credit rating downgrades.
For some time STANLIB has highlighted the need for increased diversification in investment portfolios including a greater exposure to offshore assets and investing in a wide variety of asset classes. This diversity helps to protect investments from unexpected events in a particular asset class, while also allowing clients to benefit from different sources of return. At the same time many of our investment portfolios have been relatively conservatively positioned due to our concerns about heightened political and economic risk, globally and locally. We will closely monitor the impact of the recent Cabinet reshuffle, and adjust our investment portfolios accordingly.