The recent turmoil in financial markets has become a wake-up call for investors not to become complacent. Investors will need to navigate significant distortions in asset markets that will require a deep understanding of what drove these distortions. Such an understanding will offer necessary insight into how these asset prices could correct without the magnitude of stimulation injected into the global economy seen during the pandemic.
Central banks are trying to unwind some of that stimulation to regain control of inflation. They will tolerate some volatility and weakness in asset prices but will not preside over a major collapse in stock markets, lest it generate a strong feedback loop into the banking system. Therefore, there is a solid argument for not panicking through a sell-off.
However, another sharp correction in stock markets could set in motion central bank decisions that will impact the value of the USD and the attractiveness of emerging market currencies, including the ZAR. While the ZAR will be vulnerable to this volatility, there is optimism around its ability to weather the storm and record some appreciation in the next six months due to a shift in local sentiment and an apparent effort to reform.
BASELINE VIEW:
As excessive risk premia are priced out of the ZAR, it will trade back to fundamentally justified levels. However, it now faces the prospect of some financial market volatility, typical of the end of a business cycle.
While that raises the degree of uncertainty, it also puts in motion the prospect of some central bank decisions that may tilt the scales back in the ZAR’s favour, and for this reason, one could argue that the outlook for the ZAR remains constructive.
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