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The ZAR's Eskom induced downward spiral

by , 30 July 2019
The ZAR's Eskom induced downward spiral
I'm sure you have seen the headlines signaling the Rand is on a downward spiral. We highlighted the Rand being at risk of weakness when it was below R13.90 to the USD two weeks ago. It's lost almost 3% but recovering steadily.

This bout of weakness is on the back of Eskom's new lifeline of R59 billion, over the next two years. After government committed R69 billion over three years earlier this year.

Moody's indicated Eskom's new lifeline is credit negative. Moody's indicated it expected South Africa‘s fiscal deficit to widen to 5.7% of GDP in 2019 and 5.6% in 2020, from current projections of 5.2% and 5.0. “The government may try to absorb part of this extra cost with new revenue or expenditure measures in the next mid-year budget exercise, the Medium-Term Budget Policy Statement (MTBPS), expected on 23 October, but we think its room to manoeuvre is extremely constrained”.

This means, Moody's will most likely change SA's credit-outlook to negative in November. Moody's is the only ratings agency to not list SA as sub-investment grade (Junk).

Ratings agency Fitch on Friday revised its outlook for South Africa to negative but has affirmed its rating at BB+ for both local and foreign currency debt.

John Cairns of Rand Merchant Bank (JSE:RMH), indicated the Rand could be on a slippery slope after the US Fed cut interest rates on Wednesday. This is because history has shown the Rand weakens over 30% within 12 months after a US interest rate cut. And over 40% within 15 months of a Fed rate cut.

The only positive is the Rand typically strengthens within the first two months after a Fed rate cut as the carry trade lures foreign investors.
Investors should use any Rand strength to ensure they have enough of their investment capital offshore. We often find clients all rush offshore when the currency has weakened significantly and that’s precisely the wrong time.
 
Externalize some of your assets as the Rand strengthens, if you’d like to know how to do it contact me at trader@protrade.co.za for a cost effective solution.
 
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Buy Mondi as it bottoms out
 
Mondi (JSE: MNP) simplified its ownership structure under its UK listing and is due to release results on Thursday.
 
It rallied 5.8% last week and should continue to push higher as the Rand weakens over the coming months. There is also the Brexit “cloud” that should lift in three months as the UK conclude the exit from the EU.
 
MNP isn’t an exciting company but it’s a strong cash generator, has operations in over 30 countries and generates over 90% of it’s revenue in Euros, Dollars and Russian Rubles.
 
Look at the chart below to see how it’s bouncing from the support level around R300.
 

 
Long term investors should consider investing in Mondi as it has strong growth potential due to its operations in emerging Europe. The IMF has increased forecasts for Emerging Europe growth to 2.3% from 1% for 2019.
 
The interim results due this week will provide insight into the company’s full year.
 
Buy MNP below R320 for a long-term target of R420.00 in the next 18 months.
 
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The week ahead:
 
Local: Manufacturing: Money Supply (29/07)
 
Local Results Due: HMN (29/07), HLM, JSE (30/07), AVR, ELI, ITU (31/07), ACL, LBH, MNP, VVO (01/08), SOH (02/08)
 
International Earnings Results: Heineken, Tata Motors (29/07); Apple, BP, Tesla, Xerox (30/07); Samsung Electronics, DSV, Fiat (31/07); Konami Corp, Barclays (01/08); Isuzu Motors (02/08)
 
LDT: FGL, NPKP, NPP1, PGR, PGRJ (30/07)
 
Other Economic data releases of interest…
 
Monday: BOJ Outlook Report, Monetary Policy Statement (JP); Building Approvals (AUS)
 
Tuesday: BOJ Press Conference (JP); German Prelim CPI (EU); Core PCE Price Index, Personal Spending, CB Consumer Confidence (USA); Manufacturing PMI (CNY); ANZ Business Confidence (NZL); CPI (AUS)
 
Wednesday: ADP Non-Farm Employment Change, FOMC Statement, Federal Funds Rate, FOMC Press Conference (USA); GDP (CAN); Spanish Flash GDP, Core CPI Flash Estimate (EU); Caixin Manufacturing PMI (CNY)
 
Thursday: Manufacturing PMI, BOE Inflation Report, Official Bank Rate, Monetary Policy Summary, BOE Gov Carney Speaks (UK); ISM Manufacturing PMI (USA); Retail Sales (AUS)
 
Friday: Unemployment Rate, Average Hourly Earnings (USA); Trade Balance (CAN)
 
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The ZAR's Eskom induced downward spiral
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