Johannesburg - The dramatic sacking of Nhlanhla Nene as minister as of finance, which sent shock waves through the financial community, also led to an eventful day on the JSE on Thursday.
The free fall in rand value as a result of Nene’s departure had a strong influence on the share market, but it was not all doom and gloom.
Financial shares, which are highly sensitive to the rand, fell sharply to a level seen in November last year. However, the weak rand is a welcome boost to resources shares, and the gold sector in particular. These companies earn their income in dollars and a much weaker rand will increase their rand income dramatically.
By midday the Financial index was 4.36% lower, but the Resources index had gained 5.18% after heavy losses the previous two days. The gold index was 9.29% higher and again trading above 1 000 points.
The result was that the All-share index was only 0.08% higher at 49 564 points and the Top 40 index gained 0.41% to 44 729 points. The Industrial index was 1.14% up as many of the dual-listed shares with interests all over the world will also earn more in rand.
The rand fell sharply after Wednesday’s shock announcement by President Jacob Zuma and the currency reached a new low of R15.39 to the dollar. By midday on Thursday the local unit recovered to R15.01 to the dollar but was still much lower than previously.
The general consensus is that Nene was sacked because of his opposition to an ill-conceived plan to buy expensive aircraft for South African Airways, and government’s plans for nuclear power stations which are regarded are unaffordable.
Economists are concerned that Nene’s removal will mean the end of fiscal discipline by the government which could be disastrous, particularly if South Africa’s credit rating is reduced to junk status. It will not only make it more difficult and expensive for the government to borrow money abroad, but it could also derail the country’s efforts to finance expensive infrastructure such as Eskom’s building programme.
A weaker credit rating would also be problematic for the financial sector, because no institution in the country can have a higher credit rating than the sovereign rating, even if they are well managed and well capitalised.
The share prices of the top banks and insurance companies therefore dropped sharply. The index already lost more than 10% over the past 90 days before Thursday’s rout. The Financial index, which traded at 14 940 at midday, is now at levels seen in November last year and more than 16% lower than the 52-week high of 17 999 points reached on April 27 this year.
This is mainly the result of a weak rand. The currency has been under pressure for a quite a while now because of a rampant dollar, which is supported by expectations that the Federal Reserve will start raising US interest rates from next week.
The rand started the year at R11.55 per dollar and economists now think that a level of R16.00 in the foreseeable future is quite possible, which would have been inconceivable at the beginning of the year.
The share prices of South Africa’s three biggest banks were all on new 52-week lows by midday on Thursday. Standard Bank [JSE:SBK], which before Thursday was already 21.68% lower over the last 90 days, lost another 6.86% to trade at only R113.97.
Barclays Africa [JSE:BGA] was 6.15% softer on a low of R144.71 after losing 18.65% over the previous 90 days. FirstRand [JSE:FSR] was 5.99% down at only R42.82. Before Thursday the share price had lost 19.21% over the past 90 days.
The two biggest insurers, Old Mutual [JSE:OML] and Sanlam [JSE:SLM], also suffered heavy losses. Sanlam dropped a massive 8.86% to trade at a new low of R52.33 and Old Mutual lost 3.08% to R41.84. MMI Holdings [JSE:MMI] was 4.65% lower on a new low of R21.72.
Glencore [JSE:GLN], which lost more than 50% of its value over the last three months, made a strong recovery on Thursday and traded a massive 15.73% higher at R21.33. As recently as April this year the stock traded on a high of R59.33.
Anglo American [JSE:AGL] also stabilised after losses of more than 10% on both of the previous two days. BHP Billiton [JSE:BIL] was 2.18% higher at R168.82.
Among the volatile gold shares, Harmony [JSE:HAR] traded 16.51% higher at R13.27 and AngloGold Ashanti [JSE:ANG] gained 11.52% to R107.39. Gold Fields [JSE:GFI] was 9.49% stronger at R41.08.
In the industrial sector, SABMiller [JSE:SAB] and British American Tobacco (BAT) [JSE:BTI] both reached new records. SABMiller is now trading above R900 and at midday was 3.77% higher at R927.50. BAT gained 1.96% to R845.86 to move just beyond the previous record.