Finweek_English_Edition_-_March_19,_2020__

(Jacob Rumans) #1

in brief in the news


@finweek finweek finweekmagazine finweek^ 19 March 2020^13

By Jaco Visser

MARKETS


Global shares, oil buckle under viral threat


t


he South African stock and bond market,
together with the rand, showed their fragility
as panic about the coronavirus, or Covid-19,
gripped investors across the globe.
By 10 March the FTSE/JSE All Share Index
slumped by almost 11.8% since the beginning of the
year, whereas the rand slid by more than 11.7%. Over
the weekend of 6 to 9 March, the currency fell from
R15.67 to as low as R16.97 – its weakest level in
almost five years – before retracing to R16.24 as the
markets opened on Monday 9 March.
The rand’s slump followed a net selloff of R3.6bn
in locally-listed stocks by foreign sellers on Friday
6 March, data from the JSE shows. Foreigners
sold net R2.4bn in bonds on the same Friday, a
spokesperson for the JSE confirmed.
Jitters about the local market came on the back
of the enormous shift from risky assets to safe-haven
assets in developed markets.
“The weaker rand experienced in early March
was a function of global factors, rather than being
SA specific,” Etienne Roux, equity analyst at Truffle
Asset Management, told finweek. “Markets are
currently in a risk-off phase, which generally results
in emerging-market assets, and currencies, being
sold down as investors switch to safe-haven assets
such as the dollar and gold.”
The coronavirus unleashed fears about world
economic growth (see story on p.39) and what
will happen locally. Slower global GDP growth
necessarily means a slump in energy consumption


  • and by extension demand for oil. This prompted a
    call for the Organization for the Petroleum Exporting
    Countries (OPEC) by its members to cut production
    to support prices.
    “We have ended up with an all-out price war,
    after Russia refused to participate in additional
    cuts,” wrote Hussein Sayed, chief market strategist
    at London-based currency dealership FXTM, in a
    note to clients in March.
    In turn, Saudi Arabia decided to return to its 2014
    strategy of defending its market share, explained
    Sayed. The Saudis announced massive discounts
    to their official prices for April, and there are
    expectations that the country will ramp up
    production to above 12m barrels per day, when
    global demand is expected to slump by more than
    3m barrels per day this year, he said.
    The combination of a supply surge and
    plummeting demand led oil prices to fall by more
    than 30% overnight on 8 March, the biggest


Etienne Roux
Equity analyst at Truffle
Asset Management

As the Saudis and Russians embark on an oil price standoff, importers such as South Africa may benefit.
If the economy holds up.

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“The weaker rand


experienced in


early March was a


function of global


factors, rather than


being SA specific.”


one-day fall since 1991, when prices declined by
35% after the Gulf War allies sent hundreds of
planes on bombing raids into Iraq, Sayed said.
SA consumers stand to benefit from the oil price
war with a benign effect on inflation and additional
impetus to cut the interest rate.
“Generally, the SA economy benefits from lower
oil prices, given that we are a net importer of oil,”
according to Roux. “Lower oil prices should result in
lower inflation and a better current account, which
should provide some scope for the SARB [South
African Reserve Bank] to cut interest rates. Provided
a weak rand does not spoil the party, the lower oil price
should ultimately benefit the consumer.” Oil is primarily
an input cost for the diversified miners, and as such
should help their profit margins over the medium term,
he says.
What does this mean for investors? For investors
with a long-term time horizon, there are always
interesting opportunities in the market, especially after
a 15% market correction, according to Roux.
“It is important to remember that this correction
has not been triggered by a financial crisis, such as
the sub-prime collapse during the global financial
crisis,” he says. “The Covid-19 crisis has triggered
fears of a global recession, and the markets are now
starting to price this in.”
To mitigate the fallout of the coronavirus outbreak,
central banks have started to shore up liquidity by
lowering interest rates.
“Once we are at an inflection point and global
infection rates have peaked, the market will probably
look ahead to a liquidity-backed recovery,” says Roux.
“At this stage it’s difficult to determine whether we
have a V-shaped recovery or a protracted recovery.”
Stèphan Engelbrecht, fund manager at Anchor
Capital, has the same view.
“The indiscriminate sell-off on the JSE has
provided some opportunities,” he told finweek. “But
investors need to be selective and realise that we are
entering a period of extreme uncertainty and volatility.
Investors must keep their eye on the horizon, ignore
short-term price movements and assess the
lasting impact of these events on the business
model of the company.”
He adds that strong balance sheets are
critical as companies may have to sustain a
prolonged period of difficult operating environments
before investors will start to see the benefits of buying
at these depressed valuation levels. ■
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