Johannesburg - The correction in South African stocks picked up pace yesterday, with the JSE all share index tumbling 3 percent as world equity markets kicked off September in free-fall due to concerns about China’s faltering economy.
The JSE was hit by indiscriminate selling right across the board. Shares of companies most sensitive to slowing economic growth and most exposed to discretionary consumer spending led the declines.
Shares of clothing and home goods retailer Mr Price Group dropped 13.25 percent to R207.01 after the company posted a poor sales update, blaming a drop in consumer confidence and merchandising missteps. It was the stock’s biggest drop in more than 14 years.
Stephen Meintjes, the head of research at Momentum SP Reid Securities, said: “The stocks were down in reaction to the uncertainty created by the Chinese market moves, the devaluation of the yuan and the (Chinese) purchasing managers’ index.”
He added: “There is consensus that South Africa might be heading for a recession. We have had a bull market for six years.”
Shares of commodity producers also took a beating as the slowdown in China is poised to curb demand for such industrial inputs as iron ore, platinum, coal and copper.
Lonmin dropped 6.7 percent to R6.71, while Anglo American shed 5.2 percent to R139.24.
The global equities sell-off has wiped off about $6 trillion of value in stock markets.
Banks dive
Bank shares also fell, sending the JSE bank index down 3.43 percent.
A recessionary environment means that the banks will need to put up more money to cover bad debts as a stalling economy and job losses raise the possibility of defaults on loan repayments.
Yesterday’s market rout sent the all share index down 12 percent from its April record peak, signalling that the broader market had now entered what is known as a correction.
A decline of more than 20 percent would put the stock market in a bear market.
The slide in equities was accompanied by a slide in the rand, which dropped as low as R13.41 in late trading against the US dollar. A week ago, it dropped to briefly touch a record low of R14.06 against the US dollar. Poor economic reports from China and Europe set off the global market slide.
At 5pm the rand was bid at R13.3788 to the dollar.
Locally, the seasonally adjusted Barclays purchasing managers’ index (PMI) fell by 2.5 to 48.9 points in August from 51.4 the previous month. This was against market expectations of 51.1. The neutral 50-point mark separates growth from contraction.
Barclays said the PMI dip suggested manufacturing production might have contracted in August.
“The average PMI for the first two months of the third quarter is only just above 50 points, which suggests that manufacturing output remains under pressure after contracting in the second quarter,” Barclays added.
China factor
China is the largest importer of South Africa’s commodities, which in turn are the nation’s top foreign currency earner.
Earlier yesterday a report showed that activity in China’s factory sector shrank at its fastest rate in at least three years in August, as domestic and export orders tumbled, hitting global markets and increasing fears that the second-largest economy may be heading for a hard landing.
Even more worrying, China’s services sector, which has been one of the lone bright spots in the sputtering Asian economy, also showed signs of cooling.
News of deteriorating business conditions set off fresh selling in Chinese shares, with the main indexes tumbling 5 percent at one point before recovering some of the day’s losses by the close.
World stocks and commodity prices also took a hit.
In another working development, unemployment in the euro area unexpectedly declined to its lowest level in more than three years, signalling the region’s recovery is gaining pace even as dark clouds from China gather on the horizon.
Europe, as a bloc, is South Africa’s major trading partner behind China.
The local PMI is an economic activity index based on a survey by the Bureau for Economic Research and sponsored by Barclays.
Barclays said a notable development in the August PMI was the sharp drop in the index measuring expected business conditions in six months’ time, which declined to 52.5 points from 63.2 previously.
It said the main contributors to this decline were an intensification of load shedding, as well as persistent weak demand conditions.
Barclays said: “Heightened concerns about the slowdown of the Chinese economy cause downward pressure on international commodity prices. Lower prices weigh on the local mining sector, with potential adverse spillovers to manufacturing.”
Annabel Bishop, the chief economist at Investec in South Africa, said: “As the slowdown in China and low commodity prices persist, along with the Reserve Bank’s raising interest rates into an industrial sector recession, it is unsurprising confidence in future business conditions is deteriorating.”
The latest report released last week shows gross domestic product (GDP) shrank by 1.3 percent in the quarter to June, after rising 1.3 percent in the first quarter.
This is the second quarterly contraction since the economy emerged from the last recession in 2009.
The textbook definition of a recession is two consecutive quarters of contraction in GDP.
Statistics SA reported that key sectors of the economy – such as manufacturing, mining and agriculture – had contracted during the second quarter, mainly because of the persisting energy constraints.
* With contributions from Dineo Faku, Banele Ginindza, Reuters and Bloomberg.
** Follow Ellis Mnyandu on Twitter: @Ellis_Mnyandu
BUSINESS REPORT