Super volatility is here to stay
If you’re employed in the investment industry then the last few months must be among the most volatile you’ve ever witnessed. Share prices are up 5% one day and down by an even greater margin the next. And there seems to be no end in sight. Until investors get to grips with the new global trading environment this volatility is here to stay.
The local currency has exhibited similar wild fluctuations. A couple of weeks ago the rand fell hard against the US dollar – plummeting from around R8.50 to as low as R11.80 before stabilising at its current R10/$ mark. Usually when the rand falls out of bed we have to brace ourselves for a round of price increases, and you’ll probably pay more for a range of imported product in coming months – with one major exception.
Oil, the commodity everyone loves to hate, managed to fall further and harder than the rand. And that means local consumers should benefit from a decent reduction in the petrol price in December. Economist Mike Schussler told Sapa that “there’s a good chance of petrol going under R8 a litre and diesel under R8.50.” This reduction will bring some welcome relief to cash-strapped consumers and small businesses. Schussler warned readers that volatility could get the better of this expectation too. If either oil or the rand fall out of bed again, the expected price cut could evaporate in an instant.
A smattering of good news
There was more good news on the domestic front this week. The first is a sharp fall in SA government bond yields – a leading indicator that inflation is on the decline. Economists expect a sharp decline in the CPI and CPIX measure as we enter 2009 – partly due to changes in measurement techniques and partly due to lower food and fuel prices. Those who believe this weakening will lead to a rate cut in December this year will probably be disappointed though. Recent rand weakness will put thoughts of a rate cut on hold till February 2009 at the earliest.
Resources shares also gained ground on Monday on news of a massive Chinese infrastructure expenditure plan. The world’s largest emerging economy announced the initiative to halt the slide in its GDP number. Have investors responded too quickly to sentiment? If you look at the news flow from South Africa’s mining industry then they’ve definitely jumped the gun. The major steel manufacturers have announced massive cuts in recent times. Arcelor Mittal is reducing steel production by some 20% and local ferrochrome producer Xstrata has shut six of its smelters. Platinum mines are cutting jobs, reducing production and delaying capital expenditure too...
So while we welcome the good news, there’s little doubt that equities could take more strain in coming months. There are a number of international market commentators who believe we’re in for a couple more years of lacklustre performance. We need to know how deep the recession in the US, UK, Europe and Japan will be, and how long it will last, before we can make assumptions about a market recovery.
The ratings agencies give South Africa stick
To make matters worse, it seems global credit ratings agency, Fitch Ratings has the knife out for South Africa. Earlier this week the agency downgraded South Africa’s “sovereign long-term foreign currency issuer default rating” from stable to negative. The move was dismissed by National Treasury as an unnecessary tarring of South Africa with the same brush as 17 other emerging economies. According to Treasury the IMF Financial Stability Assessment Report was a better indication of the country’s readiness to weather the current economic turmoil. The IMF says: “South Africa’s financial system is fundamentally sound and well-capitalised.”
Fitch didn’t leave things there. On Tuesday they issued a series of downgrades to locally listed banks. The ratings outlook on Absa, Investec Bank and Nedbank were also downgraded from stable to negative. Local investors shouldn’t be too concerned – Standard and FirstRand were downgraded in similar fashion in August and September last year. Fitch quotes the global credit crisis as the reason for the latest round of downgrades. They say that the domestic economy will suffer due to lower levels of economic activity.
Banks will experience further pressure due to the high interest rate and resulting levels of consumer indebtedness.
Editor’s thoughts:
Although locally listed shares have recovered from their worst levels it seems there’s more pain to come. The mining sector is under severe strain, and banking shares have been re-rated. Would you be pouring funds back into equities – or do you think its best to wait out the storm in cash for now? Add your comments below, or send them to [email protected]
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