OPINION: Black swan is alive and well and may have a cygnet in SA

By Chris Harmse Time of article published Feb 3, 2020

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JOHANNESBURG - The Coronavirus black swan in China (an unpredictable and unexpected happening) continues to haunt financial markets and currencies across the globe.

The World Health Organisation last week declared the coronavirus a global health emergency.

This implies that there is a risk that the deadly virus could expand to the rest of the world.

Although it is expected that markets overacted on the spread of the deadly virus, it may take some months to recover and may put the world economic growth and emerging market exchange rates under pressure.

The news that US home sales in December were also lower than expected and the decision by the Federal Reserve not to decrease its bank rate had led to a movement away from risky assets.

Reuters reported on Friday that “emerging market currencies and stocks have fallen broadly as the MSCI’s index for emerging market stocks shed 0.7percent, while the currencies index fell 0.3percent”.

Investors also turned to gold as a hedge against the uncertainty of the coronavirus.

The gold price had broken through a seven-year high level of $1580 (R23655) on Friday and bullion outperformed the US stock market in January. But the black swan may have a cygnet living in South Africa.

It is called Eskom and load shedding.

Since the reintroduction of electricity blackouts by Eskom last week it becomes evident that the South African economy may move into a negative growth scenario with a recession looming. Therefore, the rand and equities were hit the hardest of all the emerging markets.

The rand exchange rate had lost more than 60cents (0.45percent) against the dollar from R14.32/$ to R14.98/$ on Friday afternoon.

The currency against the pound traded down by 85cents (4.5percent) since the previous Friday at R19.70 and against the euro the rand depreciated by 67cents (4.1percent) to trade at R16.57.

On the JSE equities experienced another large sell-off last week in reaction to the fear that the coronavirus would constitute a serious threat to the Chinese economy, South Africa’s biggest trading partner.

The Alsi lost 1128 points (2.1percent) over the week.

It now trades more than 1000 points (1.8percent) lower than at the beginning of the year and almost 3000 points lower than its highest level of 59001 points during the middle of the month.

With the exception of the gold index, all main indices also took quite a hiding last week.

The Industrial 25 index lost 1.9percent, the Financial 15 index was down by 3.1percent, whilst the Resources 10 index traded lower by 2.02percent.

Even the Gold mining index, gaining more than 4percent last week, managed to end the month barely positively by only 0.14percent.

Of interest is the decrease in the long bond rate from 8.24percent on January 10 to 8.02percent on Friday.

This still indicates that South African paper is popular and attractive as a safe haven for investors.

Maybe it shows that the market will surprise many if Moody’s downgrade the country’s sovereign debt to junk at the end of February.

This week investors’ attention will remain on the extent of the spreading of the coronavirus as well as the magnitude of load shedding by Eskom domestically.

The rand exchange rate will stay under pressure and equity markets may continue their downward correction as US equities took a tumble of more than 1.5percent during the first hour after the opening on Friday.

Of importance also will be the effect of the latest jobs data of the US that was published on Friday.

The Manufacturing Purchasing Managers Index (PMI) of China for January that will be released today will also be of importance as it already may point towards the effects of the virus.

Most other countries, including South Africa, will also announce their various PMIs.

Chris Harmse is an economist and chief investment officer.


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