South African Market Review: Quarter 1

2015-04-07 08:24

Johannesburg-- (Sunburst Africa) During the first quarter of 2015, the South African stock market was buffeted by three main substantial shocks. One may argue that the impact of these factors will continue into the second quarter. The all-share index lost 2.59 percent in the last 30 days of the first quarter and the trend may continue into the second quarter.

The first market shock of quarter 1, involved the Resources and Energy sector.  The past months have seen the abrupt and persistent decline in the oil price. Certain grades of oil and related energy products have lost close to 50% percent of their value globally. In South Africa companies like Sasol among others in the sector have been  hard hit as their share prices fell sharply. Sasol lost 4.37 percent in its price during the first quarter of the year and may lose more value into second quarter.

We expect the downward pressure to continue into the second quarter. The first quarter of 2015 ended  with falling oil prices. The outlook for most, if not all, of 2015 is a continuation of low oil prices. The range of prices is not easily predictable – some analyst see oil prices lower than $40 a barrel in late 2015. However, whether that materialises remains to be seen.

On the other hand, the slowdown in global growth especially in South Africa's biggest trading partners like China have meant a decrease in demand for resources affecting the SA resource sector and the entire stock market index. The gold and platinum indices have both lost 1.21 percent and 5.86 percent respectively in the past three months.

The second shock came from the European Union, particularly the European Central Bank (ECB). Central bank policy in the Eurozone is now based upon negative interest rates on the highest-grade sovereign debt. The ECB policy rate is minus 20 basis points, or -0.20%. The ECB has said that it will acquire sovereign debt of Eurozone countries as part of its expanded quantitative easing (QE) program and that is it willing to pay negative interest rates as long as the negative rate is no lower than -0.20%. This is an unprecedented policy both with regard to its longevity (18 months) and its size ($1 trillion equivalent).

Those negative interest rates are having an impact worldwide. They are suppressing interest rates elsewhere, including South Africa. The outlook is for this Eurozone and ECB policy to continue through most if not all of 2016. Though no one can forecast the ultimate outcome of this policy, our best guess is that it will continue to suppress interest rates on a global basis: those rates will be lower than they would otherwise be. We cannot say by how much.

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The Energy crisis continue to send shock waves across the investor community in South Africa and has been compounded by the downgrade of  Eskom by rating agencies. The crisis at Eskom continues to affect the manufacturing and other sectors of the economy. The combination of these shocks is very gloomy for various sectors in SA. Potential interest rates hikes, higher inflation, and a slow economic growth profile is the likely outcome in SA. This scenario offer buy opportunities for all asset prices, particularly for the South African stock market. Investors need to watch out for various buy opportunities as asset prices may fall for various classes of assets.

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