Johannesburg Stock Gains May Prove a Red Herring Amid Eskom Woes

(Bloomberg) -- South African stocks are heading for the best weekly rally since Jan. 11, but don’t be fooled by the apparent momentum. The path of least resistance leads down.

The benchmark FTSE/JSE Africa All Share Index has added 2.1 percent in the past five days, with its 50-day moving average looking to cross above the 100-day mean. That’s made equities look resilient even as a crisis at the state-owned power utility Eskom fuels a sell-off in the rand and government bonds.

Johannesburg Stock Gains May Prove a Red Herring Amid Eskom Woes

But look deeper and stocks are as vulnerable to the operational and financial troubles at Eskom as the nation’s currency and debt are. Despite President Cyril Ramaphosa’s assurances that a plan to split the utility into three would address current problems, the threat of blackouts hampering economic activity remains.

“Even if the utility’s debt was all magically paid off tomorrow, South Africa would still have a shortage of electricity,” said George Herman, chief investment officer at Citadel Investment. “Industrial, retail, construction and domestic property stocks will face dramatic headwinds moving forward because of the electricity blackouts,”

Meanwhile, local traders are making short-term gains by betting on stocks that benefit from the rand’s weakness. That’s little consolation to global investors who have lost 4.6 percent in dollar terms in the past two weeks.

While Eskom’s woes prevent the recession-hit economy from recovering quickly, they also raise the risk of credit-rating downgrades.

Finance Minister Tito Mboweni will present plans next week to keep afloat the cash-strapped utility, which has 419 billion rand of debt. Providing financial support before taking measures to generate savings at the utility would be credit-negative for the country, Moody’s Investors Service said earlier this week. The remedies would entail “unpopular decisions on electricity tariffs,” it said.

“A credit rating downgrade would further reduce our relative attractiveness as an investment destination,” said Citadel’s Herman.

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