CAROL PATON: Traders hedge bets around ANC outcome
Is it possible to make money out of the ANC conference? Some delegates most certainly have.
Both sides in the race for the top positions have been "looking after their delegates" in the lead-up to the conference, cloistering them in fancy hotels and passing on all manner of perks.
Besides these 5,000 people or so, there has also been another class of people, far wealthier and far more powerful, who also hope to gain — or at least not to lose. They are the short-term currency traders.
There has been unprecedented interest in the conference. As the outgoing ANC economic policy head, Enoch Godongwana, told journalists ahead of the conference, this is the first time the rand had been linked to who will be elected leader. The market has taken care to follow in close detail the leadership race in the ANC.
Hundreds of investors have streamed through Johannesburg and Pretoria in the past three months with routine stopovers at the Treasury, the Reserve Bank and the ANC — usually at Godongwana’s office.
Their biggest interest, even more so than the governance of state-owned enterprises, has been politics, and they have met political analysts and journalists to ask two questions. Who will win? Which day and at what time will we get the result?
For months now the market has seemed to favour a Cyril Ramaphosa win while at the same time pricing in more risk on rand assets and bonds.
The move has been particularly marked in bonds: real yields are about 5%.
If there is a large sell-off – in anticipation of a downgrade, which is mostly although not exclusively associated with a win by Nkosazana Dlamini-Zuma – then valuations could be hit quite severely.
If SA were to exit the World Government Bond Index, which would happen if Moody’s downgraded SA after February, then an estimated R140bn could flow out of the country. (But as some have pointed out, there is other money that does not have that constraint that would flow in.)
When it comes to the rand, the market has consistently been more optimistic than, for instance, the press or the general public. On several occasions over the past year or more, the rand has moved positively in response to incorrect reports (albeit from authoritative international news sources) that President Jacob Zuma was about to be removed or planned to step down.
But because the race has been so close, many currency traders have held neutral positions for most of the year. In the immediate lead-up to the conference, that began to change and traders say the market has shifted from pricing a Ramaphosa win from 50% to about 55% or even 60%.
The increasing optimism can be seen in the movement of the rand. At the start of last week, the rand was R13.65 to the dollar. On Saturday, the day the conference began, it continued strengthening and by the end of the day was at R13.10.
Speaking to market participants over the past week, traders said they were looking at the implied volatilities in the options market, which last week were about 8%.
This suggests how far the rand could move positively or negatively after the results.
Interestingly, said one, the expected movement was "skewed", indicating that most people foresaw a bigger sell-off if Dlamini-Zuma won than a rally if Ramaphosa won.
The most important thing, though, is not to lose. To minimise this, said another trader, most people had hedged their rand losses, enabling them to take full advantage of the upside if Ramaphosa won, and not to lose too much if he didn’t.
As the leadership race is still not decided – if the conference had run according to schedule, the result would have been out on Sunday evening or Monday morning – this makes for an exciting day’s trading.
On day one, it seemed from the signs at the conference — the muted support for Zuma, the huge caucus mustered by the Ramaphosa faction on Saturday night and the loss of key battles by the NDZ camp in court – that Ramaphosa was in the ascendancy. But on day two, this looked less certain: massive support was mounted during the nomination process.
In the end, it could just be a photo finish.
This is, of course, not certain and anything could happen in the next while. Traders still hope for that sweet spot, though – getting the news ever so slightly before anyone else.
In this they have fond memories of the vote of no confidence against Zuma in Parliament, which also presented a betting opportunity.
Those watching the Twitter account of Ranjeni Munusamy were rewarded: she got the result momentarily before it was announced and tweeted it, sending the screens of currency traders into paroxysms of fear and delight.