Investors bore witness to some of the largest swings in equity, fixed income and currency markets in many generations over the past two weeks. Some would say that bargains are to be had now. Investors, however, need to tread carefully.
“A global health pandemic has turned into an economic and financial crisis, driving a sudden stop to economic activity as authorities look for ways of solving the health issue,” Roy Mutooni, equity analyst at Absa Asset Management, tells finweek. “It is important to realise the economy will not suddenly start up even if the health issue is resolved: jobs have been lost, loans defaulted on, contracts reneged on, and supply chains broken.”
In this context, he says, “investors need to be very careful and ensure they have a sound strategy based on discipline, patience and consistency”.
The FTSE/JSE All Share Index, which is a gauge of all the stocks listed on the local bourse, declined by 34% between 2 January and 19 March – the lowest level in seven years, according to Reuters. The next day, on 20 March, the South African Reserve Bank announced quantitative easing – or the printing of money and subsequent buying of government bonds – in a bid to bolster cash liquidity in the SA economy. This followed on the bank lowering its key interest rate by one percentage point the previous day.
The all-share index has risen by just over 21% since its seven-year low by the time of writing this article. Investors should realise that, even at the current apparent cheap levels of assets, that it is “impossible to catch the bottom”, says Mutooni.
“Investors need to accept that mistakes in timing are inevitable and decide which is more palatable: being too early and risk getting wiped out, or being a bit late, missing out on the first 10% to 20% but participating in the subsequent upside,” says Mutooni.
With the all-share index being almost 20% lower since the beginning of the year, it seems that the stock market has stabilised since 26 March and has followed global markets with a rally since the bottom of 19 March, Etienne Roux, equity analyst at Truffle Asset Management, tells finweek.
“Global markets have found comfort in the significant fiscal stimulus announced by governments around the world to fight the coronavirus, as well as the stabilisation of infection rates in Europe,” he says.
Shaun Murison, senior market analyst at IG.com and finweek contributor, says the last week has seen our local equity market “start to rebound from severely oversold levels”.
“Food and drug retailers have been resilient and market outperformers, but in the near term we are also seeing broad-based market gains,” he says. “The broad-based market gains are perhaps an indication that the initial panic in the market has subsided.”
The rally in the JSE was predominantly driven by the so-called rand hedges while companies focused on SA lagged, according to Roux.
“Rand hedge counters have been among the gainers with companies like Naspers*, Prosus and Richemont aiding gains on our local bourse,” says Murison.
Naspers recovered by 38% since its low on 18 March, bringing its share price rise since the beginning of the year to 12%. Prosus, who was spun off the former, rose by more than 40% since its low of R891.62 on 18 March, bringing its gain for this year to 17.4%. Richemont, the owner of luxury brands with large sales exposure to mainland China, recovered more than 24% since its low of R84.19 on 16 March, but the stock is still 11.6% down since the beginning of the year.
The pummelling of the rand, which slid 31% against the dollar since the beginning of the year, was mainly the result of risk averseness by offshore investors.
“The rand typically sells off aggressively when the world goes into risk-off mode, as it is seen as an emerging market proxy,” says Mutooni. “These selloffs typically overshoot, but eventually retrace, though not necessarily to prior levels.”
The rand is supported by a combination of high yields on government debt and the Reserve Bank’s buying of government bonds, he explains. This “may reduce some of the volatility seen recently”, according to him.
The high yields may be alluring to offshore investors desperately in need of higher yields as negative interest rates are the norm in some developed countries.
“We think that until the formal exclusion from the WGBI (World Government Bond Index) happens at the end of April, the selloff will not be done, and higher-than-normal volatility in the currency will remain,” says Mutooni.
Following on SA losing its last remaining sovereign investment-grade credit rating from Moody’s Investors Service at the end of March, government bonds will drop out of the tracked index necessitating a selloff by passive investment funds.
“It is also important to remember that while the country remains on lockdown, local exporters have been unable to move products or hedge, hence trading in the currency has been largely one sided,” Mutooni says.
And it is not only local exporters struggling amid the coronavirus lockdown.
“SA Inc is facing up to a difficult short- to medium-term outlook,” he says. The impact of the lockdown on non-essential service or product providers will be significant, as they will have to bear costs, while earning no revenue over this period, he explains with reference to those listed stocks with the bulk of their revenue exposure to SA.
“Industrial counters led by general retailers are under extreme duress as business is halted for the time being,” says Murison. “This place further pressure on landlords (Reits). Local banks’ fortunes are linked to that of the SA economy, an economy which is already in a recession and unlikely to have grown in the last or current quarters.”
The FTSE/JSE Financial 15 Index dropped by 48% between 2 January and 23 March – when it reached its crisis low – and rose by 26% ever since. Standard Bank, Africa’s largest bank by assets, dropped to an intraday low of R84.64 – not seen in many years – on 23 March before recovering to R117.90 by the time of writing. The stock was down 37.5% since the beginning of the year.
FirstRand, the largest listed bank by market capitalisation, breached its December 2015 closing price low of R35.57 to close at R33.90 on 19 March and 23 March. It has lost 38% since the beginning of the year by the time of writing.
“We expect developed markets to bounce back quicker than emerging markets, hence we see better opportunities in shares listed offshore or SA-listed shares that earn their cash flows in hard currencies,” says Roux.
* finweek is a publication of Media24, a subsidiary of Naspers.