Get more Mail & Guardian
Subscribe or Login

Emergency exit here

Mild panic has gripped the world’s financial markets as the stock market rout that started in early May continued this week, with many stocks losing up to 10% of their value in as many days.

Asset managers attempted to douse the growing panic by advising investors to stay calm, though those who heeded the same advice in 1998 had to wait nearly two years to recover from the 40% drop in stock prices. Investors with bitter memories of the 1998 and 2002 market slumps started off-loading stocks this week to lock in profits. They will be pleased with the 160% gain in stock values since 2003.

Foreign investors also started heading for the exit door. By Wednesday they had sold nearly R400-million worth of shares, a sharp reversal from the R3,4-billion inflow of the previous week. Foreign investors pumped R53-billion into local equities so far this year, beating the R50-billion record for the whole of last year. According to Brait economist Collin Garrow, this has been driving up prices in recent weeks. “There has been some over-exuberance in the stock market this year, and I think what we are seeing is some profit taking.”

The ALSI 40 index has appreciated 160% since 2003, and was long overdue for a correction, according to market analysts. But the speed of the reversal caught everyone by surprise.

The rand has lost 10% of its value over the past month, and traded this week at R6,63 to the dollar. This could have a domino effect as exporters hold back on repatriating revenues to see if the currency weakens further, while importers will attempt to buy dollars now for the same reason. This could aggravate the rand’s decline, and force the Reserve Bank to raise interest rates as a defensive measure. There is a positive side to this in that a weaker rand will help exporters, and put the country’s current account back in the black.

Volatility in the ALSI 40 index (above) jumped from 15% to 16% this week, though it is still well below the highs of 26% and 27% reached in 2002. Head of quantitative research at Cadiz, Dave Bradfield, says price volatility is a direct measure of investor uncertainty and has been declining for the past three years owing to the steady gains in JSE stock prices. “When market volatility is high, investors have a greater risk of loss, so they will want to be compensated in the form of higher potential gains in order to stay in or re-enter the market,” he says.

Volatility is also an indicator of the market top, and is frequently followed by a price reversal. How deep this reversal will go is anyone’s guess, though few fund managers expect a repeat of the 40% decline of 1998 and 2002.

Garrow adds that the economy is now in far better shape than in 1998, suggesting a repeat of that tumult is less likely. “Inflation is now below 4%, and the government has committed itself to major capital-spending projects to lift economic growth to 6% over the next few years. This provides a stronger underpin to the markets.”

Louis Stassen, chief investment officer at Coronation Asset Managers, points out that stock prices are still 10% up for the year to date. “If someone had said to us at the beginning of the year that we could earn 10% in the first five months of the year, we would have taken it. Our projection is for a 15% rise in stock prices for the full year, and we’re still on target to achieve that.”

Emerging economies have been particularly hard hit in recent days as investors fled for safe-haven destinations. The voter swing towards left-wing leaders such as Hugo Chavez of Venezuela and Evo Morales in Bolivia, who last month nationalised the country’s gas fields and refineries, has not gone down well with Wall Street. There is a fear that the United States’s belligerence towards Iran and Venezuela, both major oil producers, could escalate into a global crisis and trigger a worldwide inflationary spiral should oil prices rise further.

But there are other reasons for the flight from emerging economies. Sasfin fund manager David Shapiro says the supply shortfall in some commodities such as copper appears to have been exaggerated. Copper prices shot up 63% since March on fears of a supply shortage, but retreated 7% in the past few days. Stassen adds that the yield difference between emerging and developed market bonds has narrowed from 700 to 180 basis points in the past four years, to the point where investors were largely overlooking the emerging economy risks.

Commodity prices have taken a hammering in recent days, and may have passed their peaks for the time being. The gold price jumped 31% since March this year, mirroring the dollar’s decline, but has fallen 8% since the beginning of the month. Tin recorded one of the largest price drops, falling 16% in a matter of days. Aluminium is down 13% since the beginning of May and zinc 14%.

For commodity-producing countries like South Africa, Australia and Brazil, this has had a devastating effect on the currency markets. The Brazilian real lost 9,3% of its value and the Australian dollar 4% over the past 10 days.

Shapiro says this is a good time for investors to take some profits. “I don’t think this is a repeat of the 1987 or 1998 crashes, for the simple reason that the domestic economy is now in far better shape than it was then. But taking some profits now is not a bad idea, and even if it turns out to be a mistake and the market quickly recovers, there will be other opportunities to re-enter the market.”

Subscribe for R500/year

Thanks for enjoying the Mail & Guardian, we’re proud of our 36 year history, throughout which we have delivered to readers the most important, unbiased stories in South Africa. Good journalism costs, though, and right from our very first edition we’ve relied on reader subscriptions to protect our independence.

Digital subscribers get access to all of our award-winning journalism, including premium features, as well as exclusive events, newsletters, webinars and the cryptic crossword. Click here to find out how to join them and get a 57% discount in your first year.

Ciaran Ryan
Guest Author

Related stories

WELCOME TO YOUR M&G

If you’re reading this, you clearly have great taste

If you haven’t already, you can subscribe to the Mail & Guardian for less than the cost of a cup of coffee a week, and get more great reads.

Already a subscriber? Sign in here

Advertising

Subscribers only

Family wants clarity on SANDF soldier killed in friendly fire...

Corporal Simanga Khuselo join the peacekeeping mission in the DRC to save money to build his family a home

SA soldiers have been fighting in a distant land for...

Troops were sent to the Democratic Republic of the Congo in 2001 as part of the UN peacekeeping mission that became an offensive against rebels

More top stories

Family wants clarity on SANDF soldier killed in friendly fire...

Corporal Simanga Khuselo join the peacekeeping mission in the DRC to save money to build his family a home

SA soldiers have been fighting in a distant land for...

Troops were sent to the Democratic Republic of the Congo in 2001 as part of the UN peacekeeping mission that became an offensive against rebels

Security beefed up at Philippi school where teacher was killed

‘He was like a loving father,’ says community member of murdered teacher in Philippi, Western Cape

Q&A Sessions: Lebo M — a lifetime of roaring

Lebo M tells us about his journey from South Africa to Hollywood, his days as a ballroom dancer and his successful battle against alcohol abuse.
Advertising

press releases

Loading latest Press Releases…
×