Stocks in the financial sector plummeted on Wednesday as investors winced at a weakening rand against the dollar, a drop in consumer confidence and another government bailout for state power utility Eskom.
The financial sector had fallen by 1.7% in late trading, drawing the JSE All Share Index lower by about 1.2%, before regaining ground to 1.44% and 0.74% respectively.
Bradley Preston, portfolio manager at Cape Town-based Mergence Investment Managers with R31 billion under management, attributed the drop to government’s payment of an additional R5 billion to Eskom on April 2 (which only came to light on April 19) and a stronger dollar that has weakened the rand.
The local currency “walked into a storm” on Tuesday, said Andre Botha, senior dealer at TreasuryOne, in a note. He said the news of Eskom, coupled with the US imposing sanctions on oil from Iran and better-than-expected US data and earnings reports from Wall Street, contributed to rand weakness.
Preston said that local banks are offshore investors’ favoured play in South Africa at the moment so they’ve picked up a lot of correlation to the macroeconomic news. “It used to be the retailers a few years ago, but it’s shifted to the banks.”
South Africa has the continent’s most developed financial system, attracting foreign investors. But the rand, which fell to R14.43 against the dollar from R14.27 early on Wednesday, has been volatile as a national election approaches on May 8 that could undermine President Cyril Rampahosa’s planned reforms, even if he wins as expected.
Also, additional funding for Eskom creates an image of a government that remains beholden to a utility that has resorted to rolling blackouts to juggle a fleet of power plants that need repair, while mired in corruption allegations following numerous government probes.
Government had already pledged a R69 billion bailout of the utility in February to be paid over three years. Even then, questions remain about the utility’s long term sustainability.
Confidence levels down
Anthony Sedgwick, CEO and co-founder of Cape Town-based Abax Investments with R100 billion under management, pointed to Wednesday’s release of the consumer confidence index compiled by the Bureau for Economic Research that fell to +2 in the first quarter from +7 in the final quarter of 2018.
“Today we’ve had a terrible consumer confidence number and the rand has weakened,” Sedgwick said by phone. “So the domestic stocks are heavily out of favour and investors immediately go for the consumer names like the retailers Shoprite down 6% and Mr Price down 3% and, of course, the banks.”
Business confidence remains wracked by unemployment at 27% and GDP growth forecast by the International Monetary Fund at just 1.2% this year.
A rebound in confidence will depend on whether Ramaphosa wins the election with enough power in the ruling African National Congress to “reimpose law and order and accountability”, Sedgwick said.