The JSE all share index reached a record high yesterday for the fifth time this year, while the rand continued to weaken.
The index ended at 40 604.59 points – up from the previous record of 40 330 on January 9. But the local currency, which briefly moved over R9 to the dollar on Wednesday, was bid at R9.05 at 5pm yesterday, from R8.45 at the start of the year.
Colen Garrow of Meganomics said foreigners were selling out of the country, weakening the currency, but local fund managers were taking up the slack, buying shares on the JSE.
Investec Asset Management equity dealer Ryan Wibberley said rand weakness had contributed to the strength of the all share yesterday. “Resources and dual listed stocks, like Naspers, Richemont and SABMiller, did particularly well.”
In other words, investors are not buying into the local economy but into JSE-listed shares with large offshore exposures.
Garrow warned that the shift from cash to equities was a risky strategy on the part of domestic investors and predicted a reversal next month when Statistics SA published figures on gross domestic product (GDP).
But Wibberley said, given the shortage of investment options, globally equities remained a worthwhile asset class.
However, foreigners are turning their attention elsewhere. Reserve Bank governor Gill Marcus noted yesterday that, in the year to date, non-residents had sold a net R2.3 billion in equities “as growth prospects remain weak”. And she warned that sentiments towards South Africa of foreigners – who hold over a third of domestic bonds – had “deteriorated”.
Leon Myburgh, a strategist at Citi, said R4.4bn of non-residents’ funds had flowed out of local bonds and equities since January 10.
A massive current account deficit – the gap between earnings of exports of goods and services and the import bill – equal to 6.4 percent of GDP in the third quarter of last year – makes the currency vulnerable and recent social and political developments have worsened the situation.
The rand was among the worst-performing currencies last year, falling 8.5 percent against the dollar, according to Azar Jammine, the chief economist at Econometrix.
And Investec group chief economist Annabel Bishop noted that the rand had weakened from R8.10 since the start of the strike action in the mining sector in August last year. “The strike ran over into the transport sector, then the agricultural sector and most recently the social unrest in the Vaal area. Foreign investor perceptions of South Africa have worsened and so led to a rebalancing of portfolios.
“Since the middle of August foreigners sold R5.4bn worth of South African equities on a net basis as sentiment worsened on the perceived deterioration in policy clarity from both the government and the ruling party, the implications of illegal strike action on many companies (likely dip in profitability due both to production losses in the afflicted sectors and negative impact on retail sales) and the increased operating difficulty for corporates in South Africa on the rising rigidities in the labour market.”
She said, following the recent credit downgrade by rating agency Fitch, the rand weakened further “as [local] government bonds are now rated only two notches away from speculative grade”.
Stock markets globally were moderately higher yesterday on good news from China.
Bloomberg reported: “In China, a private survey of companies showed manufacturing is expanding at the fastest rate in two years. The preliminary reading of a purchasing managers’ index increased to 51.9 in January.”