Volatility rules after historic panic-driven selling over Covid-19 fears and an oil price war
International markets are still reeling after a bloodbath on the stock markets this week.
The JSE was not spared, with R3.3 trillion in market value being wiped out in the first four days of the week.
On Friday, the JSE’s all share index was somewhat higher than at Thursday’s close, but a country mile from the 52 936 points of a week ago.
It closed 1.09% higher to end at 44 785 points.
Companies, investors, pension funds and fund managers were left licking their wounds when the JSE fell by about 13% between Monday and Thursday.
Nishlen Govender, portfolio manager at Citadel, said the loss from the peak to the trough for the most important exchanges, such as the JSE Top 40 and the S&P 500, totalled about 20% and was a trigger for a bear market.
Thursday’s volatility followed the announcement by US President Donald Trump that he would institute a 30-day travel ban on 26 European countries.
Although share markets fared better on Friday, analysts are uncertain about how long the current correction will last.
A correction is a decline of 10% or more in a single share or index from its most recent high.
Chantal Marx, head of investment research at FNB Wealth and Investments, said corrections in the market, or bear markets, seldom last longer than a year.
Even during the financial crisis of 2008/09, the selling only lasted nine months, and markets recovered to the level of the previous peak within 15 months.
She said the current correction was being egged on by panic and uncertainty, caused by the effect of the Covid-19 coronavirus and by the oil price war between the Organisation of Petroleum Exporting Countries (Opec) and Russia.
Izak Odendaal, investment strategist at Old Mutual, said the decline in the JSE’s all share index had come at a time of lower economic growth prospects, adding that this would cause company profits to come under pressure.
Therefore, share prices had to adjust to reflect the situation.
At the same time, there has been a measure of indiscriminate and panic-driven share-selling over the past week.
The oil price war should also not be underestimated.
“Oil is a capital-intensive industry, and therefore capital markets and banks have major exposure to the oil sector. Even though a low oil price is good for consumers worldwide, it puts a lot of financial stress on markets,” he said.
Govender said markets had also expected more from central banks and governments in terms of stimulus packages, and there had been uncertainty about stimulus measures in the US and disappointment with the European Central Bank for having kept interest rates unchanged.
He said that the US Federal Advisory Council meeting, scheduled to take place next week, and a decision on interest rates could cause the markets to turn.
Maarten Ackerman, chief economist and advisory partner at Citadel, said that in uncertain times such as these, history had shown that you should never abandon your strategy as it could lead to you doing the wrong thing at the wrong time.
If investors were not going to need their money in the next year or so, they should wait until the situation improved, he advised.
Buying shares after a decline of 25% in the share markets means you are realising the losses without the potential of sharing in the recovery. “Stay calm and wait,” said Ackerman.
Marx said corrections can last days, months or even longer before prices recover. In the current situation, things should start looking up once there is certainty about how the world economy will recover once Covid-19 begins to abate.
This could happen through a natural process (it appears that the disease begins to recede about three months after the initial outbreak in a specific geographic area) in reaction to an Opec agreement or if a vaccine is found, she said.
Petrochemical giant Sasol was one of the biggest losers on the JSE.
At one point, the share price plummeted by 80% to about R37, before it recovered to about R49 a share on Friday, when Sasol announced that it was considering selling assets to relieve its debt of about R138 billion.
Less than a year ago, Sasol shares were still trading at R470.
The share price fell in reaction to the decline in the price of Brent crude oil to $34 a barrel. Sasol had presumed that oil would cost between $50 and $70 a barrel for the rest of its financial year, ending in June.
Hugh Hacking, general manager of operations at OId Mutual Corporate, said the decline in Sasol, with a weight of about 8% in the JSE’s shareholder-weighted index (Swix), could cost the Swix about 6%.
“That is considerable. If we assume that most pension funds have exposure to local shares of about 50% to 60%, it could cost them about 3%.”
The exact impact is difficult to determine because fund managers, in certain cases, have already been able to reduce their exposure to Sasol.
Hacking said the recent decline in world markets as a result of Covid-19, and the sudden drop in the oil price, would have a bigger effect on the value of investment.
Asked whether Sasol was a good buy at the moment, Stephán Engelbrecht, a fund manager for Anchor Capital, said the odds were in investors’ favour, as long as they were prepared to put in another R70 a share if or when there was a rights issue.
“The biggest danger is that Sasol may get capital from outside to strengthen its balance sheet and then give the benefit to investors, instead of the current shareholders. Of course, this rests on the assumption that the oil price will not stay under $40 for a long time. If that happens, all bets are off.”
Cryptocurrency has not survived the bloodletting unscathed, either.
According to Bloomberg, the value of Bitcoin dropped to less than $6 000 at one stage on Thursday.
CNBC reported that the cryptocurrency lost more than 40% of its value, undermining the argument of many proponents of Bitcoin – that it is a safe harbour in troubled market seas.