The market rout followed severe selloffs after the Shanghai exchange shed 8.5% to augment concerns about the Chinese economy. The blood also flowed in Europe where the FTSE 100 (-4.5%), the DAX (-3.7%) and the CAC40 (-4.6%) saw aggressive selloffs.
The Dow Jones also opened nearly 5% lower, but recovered in mid-morning trade to trade down 2.9%.
The selling seems to be across the board. Basil Read fell by nearly 20%, EOH by 9.9%, Glencore by 8.6%, MTN was down 7.8%, Northam 6.7%, Anglo American by 6.5%, Kumba by 6.4% and BHP Billiton by 5.6%.
On the upside gold counters performed well. AngloGold jumped by 7.6%, Harmony by 6.3% and Goldfields by 4.8%.
The gold price was down 0.34% trading at $1157, while platinum was down 3.1% at $987.
Rand under pressure
This selloff also follows a sharp devaluation of the rand. At 5:40pm the rand was trading at R13.18 to the dollar, after touching R14 briefly over the weekend. The currency was also trading weaker against the euro (R15.29) and pound sterling (R20.79).
The Reserve Bank (Sarb) has announced that it is considering intervening in the market, a step the bank has avoided in recent years as such intervention is usually not very effective. “In the event of developments that threaten the orderly functioning of markets or that may have financial stability implications, the Sarb may consider becoming involved in foreign-exchange markets to ensure orderly market conditions,” the bank said in a statement.
“While we are concerned about excessive volatility, the Sarb is committed to the exchange rate of the rand being set by market forces,” it stated.
Approaching bear market
The JSE is now firmly entrenched in an official correction. The Alsi has shed 4.3% since the beginning of the year, and 18% since April when the index reached an all-time high. If the Alsi would show losses in excess of 20% since April, the index would enter an official bear market.
In a note issued on Monday, Investec Asset Management’s Clyde Rossouw and Sumesh Chetty, say the current market turmoil comes as no surprise. “Over the past few months we have seen markets start to retreat, and the most recent turmoil is a more violent expression of this.”
Rossouw and Chetty also contend that the global picture is not much rosier. “China continues to print real GDP growth figures of 7%, but our analysis shows that the economy is actually contracting.”
The portfolio managers also say the US economy is weaker than reported numbers suggest. “Growth and job creation over the last six years has been supported by the booming shale oil states, with the rest of the country still in decline. With the count of shale oil rigs reducing as a result of lower oil prices, we are concerned that investors will not see the economic recovery that they are anticipating. We believe that this weakness will limit the extent to which the Fed will be able to raise rates, and that a normalisation of interest rates is highly unlikely.”
Rossouw and Chetty also believe that the market slowdown is set to continue as “there is no significant wall of cash waiting to drive them higher. We believe this is a very necessary correction to bring market valuations more in line with muted growth expectations.”
Foreigners are net sellers
Ryan Wibberley, head of trading at Investec Asset Management, says Monday’s selloff, while particularly severe, is not an isolated event and follows similar declines over the past few weeks on several international markets. “If you add them up, there have been major reversals around the world.”
He says there is concern over the slowdown in Chinese economic activity and the impact this will have on the global economy. “If you believe there will be a protracted global economic slowdown then this could be just the beginning of market weakness. But if you feel there are the necessary tools to arrest the situation and stir growth then perhaps the current pullback is an opportunity. A delay in a US rate hike might help markets, as might stimulus activity out of China”
It also seems as if foreigners have been selling local equities in recent weeks. “We have seen net foreign selling in recent weeks, but this has been across several emerging markets,” Wibberley says. “The rand was consequently hard hit as it is such a liquid currency.”
He says the high beta stocks are especially being hit. “The likes of MTN and Naspers are highly liquid and they are bearing the brunt of the selloffs.”