Analysts set to work assessing whether this week’s 400- point drop heralds the beginning of a major slide, reports Jacques Magliolo
Industrial bears were out in force this week at the Johannesburg Stock Exchange after the market fell by 400 points in two days. Screams of ”Sell” reverberated around the corridors of that esteemed establishment, yet by Wednesday calm had mostly returned to the trading floor.
”Every time there’s a correction in the market, traders drive fear into the minds of investors. Dealers’ panic could easily be transferred to them,” says a dealer, adding that, ”if it does, we could see frenzy selling akin to the 1987 crash before the month is over.”
Analysts are now assessing whether this ”correction” was a temporary adjustment to the market on the back of the decline in the Nikkei Dow, following the Kobe earthquake in Japan, or the beginning of a major slide.
Mike Howarth, analyst at Silvis Barnard Mellet Jacobs, believes that it could be the start of a bear trend. ”The mood at the JSE is changing to bearish and I don’t see how investors can continue to bid up for shares when you have all these negative factors taking place.”
The factors he is referring to are, in addition to the earthquake, the collapse of the Mexico exchange and the United States’ attempts at rescuing that market, which could end up backfiring on the Americans.
Another analyst explains: ”The recent fall in our industrial index is much bigger than a just a local correction. While the Mexico exchange is a small emerging market, its collapse could have a domino effect on other world exchanges, particularly the US’s.”
A change in Mexico’s government, together with poor current accounts balance and reserves, caused the peso (pegged to the dollar) to fall by 13 percent and subsequently by an additional 40 percent. This caused the Mexican exchange to collapse and is known as ”The Tequila Effect”.
Economists reason that, because Mexico is the US’s third largest importer of goods, the substantial decline in exchange rates between the two countries will worsen the American trade deficit.
Howarth says: ”There are two factors which could cause the Dow Jones to become bearish.” The first is the likelihood of a US$40-billion aid package to Mexico being passed by Congress. The second is the effect of Japanese earthquake reinsurance on world exchanges.
If Congress does not pass the package, the security of US banks’ loans to Mexican companies will be in trouble and ”there will be a loss of investor confidence in these banks,” says Howarth.
The reinsurance issue is one which cannot be quantified, but analysts generally believe that most of the Japanese