The new year had started-off on a high note for South Africa’s capital markets. Johannesburg’s all-share index surged to a peak of 9,226.5, while JSE industrials hit a record high of 10,196 in mid-January. Corporate earnings were projected to rise by 25% in 2000, with more real growth expected in 2001. The benchmark yields on R150 bond were predicted to drop below 12%, hence expectations of more interest rates cuts during the year.

The SA rand at 6.05:$1 in early January was remarkably stable. International confidence was also improved by solid credit-rating from the Standard & Poor’s, which raised foreign currency debt rating to an investment-status of BBB, and Moody’s Investors Service upgraded its sovereign outlook from stable to positive. An investment-grade rating lowers a country’s borrowing costs on the global capital markets and encourages inflows of foreign investments, including from large US-and-European pension and mutual funds.

However, the bullish case for SA markets has been derailed by mainly external influences. The spill-over effects of the “Zimbabwean contagion” are leading to a large outflows of foreign funds from Jo’burg bond-and-equity markets, exacerbating the rand’s fall. Between March and mid-April, foreigners sold an estimated R6.33bn worth of SA bonds. Recent turbulence in US markets and heavy selling of technology, media and telecoms (TMT) stocks on the Nasdaq have also hit the JSE. In the meanwhile, stagnation in prices of industrial metals and a depressed gold market have sent mining and resource stocks, which represent 35% of the JSE capitalisation, into bear market territory.

Sudden pessimism

Investor’s sentiment has suddenly turned negative. By end-April, the all-share index had fallen almost 20% since its January 17 peak. Most sectors will show negative returns for the first-half.

The current interest rate cycle has bottomed-out and the prime rate, currently at 14.5%. is unlikely to fall in the near-term. This means that real interest rates are still high, and that may undermine sustained expansion in private consumption and business spending. Meanwhile, on April 27, the rand hit fresh lows against the dollar, trading at R6.86, and with a probability of further depreciation.

Aside from political - economic instability in Zimbabwe, a precipitous drop in the euro has also dragged the rand down. The European Union accounts for over a third of SA total foreign trade, compared to America’s 10% share. Therefore, the rand is more tied to the euro’s fortunes.

The plunging rand has undermined currencies belonging to the Southern African Customs Union. Swaziland, Lesotho, and Namibia have tied their respective currencies to the rand, while Botswana’s pula is pegged to a basket of currencies, dominated by 60% SAR weighting. Sustained rand weakness poses inflationary problems in the SACU countries.

However, Zimbabwe is intent on preserving the currency’s artificial peg to the US dollar (currently at Zim$38), fixed since January 1999. The Z$ is now grossly-overvalued, having appreciated by 40% vs the euro, and some 20% against the rand during the past 15 months. The business community is urging the government to devalue to around Zim$50 to 55:US$1, in order to restore competitiveness. By end-April, prices of industrial shares had fallen 23% from record highs on January 19, 2000, in response to the bearish business outlook.

Regional instability, political concerns in Zimbabwe, civil war in Angola, and the conflict in Congo threatens inward foreign direct investment into southern Africa. South Africa, as a regional superpower stands to lose most.

One analyst neatly described SA’s plight as a “bad neighbourhood” syndrome. The SA Chamber of Business warns that events will further deter foreign investors, and their contributions are essential for the region’s economic revival.

The JSE is still very sensitive to adverse regional events and any downside corrections on Wall Street caused by higher US interest rates. But presently, SA’s economic fundamentals, like a respectable GDP growth (3.4%), benign inflation, and a modest budget deficit (2.6% of GDP in 2000-01) are inconsistent with market sentiment.

Assuming the Zimbabwean situation is contained, and capital inflows start rising again, in response to privatisations and further liberalisation of FX controls, the market should rebound in the second-half.

The rand is oversold and general consensus is that the rand will stabilise between 6.25-to-6.55:US$l by the fourth-quarter. the recent big drops in share prices and a softer rand may induce bargain hunting by foreign investors.

Despite an increase in risk-premium, prime SA stocks like Anglo American PLC, SA Breweries, Old Mutual, De Beers, and top-tier banks remain attractive, where restructuring programmes are improving the outlook for corporate earnings.

Back to the top
Contents