Stock exchanges act as a powerful and fast indicator of how the market and the business world view political initiatives. Many believe that the overall market has a wisdom that an individual policymaker or even a group of political leaders cannot expect to have. Of course political leaders are the ones elected and responsible to lead in the interests of the people, but the market is a very useful tool for quick feedback and possible corrective action.
Usually the signal is only given by plunging share prices or rising bond yields/falling bond prices (the same thing). However, last Sunday the Johannesburg Stock Exchange decided to spell out how policy decisions affect not just the stockbrokers, but the whole population, including hitting their savings, their jobs and their hopes. This came after President Jacob Zuma on 9 Dec appointed unknown David van Rooyen as Finance Minister in very dubious circumstances after sacking respected Nhlanhla Nene.
The revolt inside the African National Congress ANC and across the country was also strong. By Sunday night 13 Dec the National Treasury was back in what is seen as safe hands, with the reappointing of a previous minister, Pravin Gordhan. The ZAR currency gained on Monday, climbing back past ZAR15 = USD1, and reaching ZAR14.97=USD1 by this morning according to Reuters compared to ZAR14.43=USD1 before Nene was fired.
We reproduce a statement published by the Johannesburg Stock Exchange (JSE) and its CEO Nicky Newton King earlier on Sunday 13 Dec in full. It indicates how the market affects everyone’s welfare:
IT’ S NOT JUST THE NUMBERS – IT HURTS ORDINARY SOUTH AFRICANS
Says JSE CEO Nicky Newton-King
Johannesburg, 13 December 2015. South African capital markets posted significant losses and saw unprecedented activity following the announcement by President Jacob Zuma on the evening of the 9th of December to replace the Minister of Finance. Investors, ranging from individual retirees to huge pension funds, have seen the value of their holdings plummet. Businesses already under pressure now face increases coming from rising borrowing costs and a weaker Rand which devalued from R14.53 to R15.89 (9.36%) against the USD and from R15.94 to R17.45 (9.47%) against the EUR in the two subsequent days.
Thursday 10 and Friday 11 December 201 saw exceptional trading volumes across most platforms of the JSE:
• Average daily value traded in the Equity Market on those two days, at R47.8bn, was more than double the year to date average for 2015 (R19.9bn)
• Average daily number of trades in the Equity Market on those two days of 589 721 (both of which were record trading days) was more than double the year to date average of 246 338 trades
• The FTSE/JSE Financial15 Index (FINI) dropped 13.36% from 15 600 to 13 515
• The FTSE/JSE Banks Index lost 18.54% dropping from 6 556 to 5 340
• The FTSE/JSE All Share Index (ALSI) dropped 1 456 points in those two days, closing at 48 068 on Friday, down 2.94%
• The FTSE/JSE Top 40 Index shed 987 points over the same period, closing at 43 558 on Friday
• The entire market cap fell R169.6bn from R11.35tr to R11.18tr (1.49%)
• Activity in Equity Derivatives also peaked – value traded on 10 December (R51.1bn) was double that of the daily average of the year and on 11 December (R129.7bn) was 5 times the daily average of 2015
• In the bond market, the benchmark R186 started the week at a yield of 8.66% and closed on 10.40%. By contrast, on 29 January 2015 the yield was 7.055%.
“While the JSE systems were able to handle this unprecedented activity, we should not just be concerned about the immediacy of market reaction but should be mindful of the longer term impact on the financial stability of our economy.
“Market losses put strain on credit extension and interest rates, and raise borrowing costs for companies and individuals. As cost of capital becomes more expensive, this in turn constrains the growth stimulus which we desperately need. The outlook for much needed job creation opportunities diminishes. And higher lending rates make everyday life more expensive for ordinary South Africans. Continued currency depreciation will have a profound impact on fuel prices and on inflation overall, which will hurt companies, small businesses, and individuals.
“We should remember that behind the daily statistics are the life savings of ordinary South Africans which are likely to be negatively impacted. This will put pressure on the ability of people to fund their health and housing requirements, their household budgets, their children’s education and their entrepreneurial aspirations.
“As individuals and as corporates we need to be aware of how we are impacted by the seriousness of this moment and take accountability for how we respond.”
Yesterday and today the markets started to recover. The banking index had fallen nearly 20% and on Monday climbed back 15% but then pared back gains to 8.7% by Monday evening. The yield on the benchmark 2026 ZAR186 government bond, with effects on all debt across the market, was down 101 basis points to 9.37% on Monday morning, but closed yesterday at 9.95% and this morning was at 9.87%, while the JSE’s All-Share Index was up 2% to 49,051.
Reuters reports Investec chief economist Annabel Bishop: “Finance Minister Gordhan has averted the rout, but the damage to sentiment cannot be repaired quickly, and South Africa will continue to suffer under it for quite a while.”
NOTE – PRIME EXAMPLE Markets reflect earnings prospects: It was fascinating to see how the “elephant bond” – Cote d’Ivoire’s previous Eurobond – adjusted its yields with every advance or retreat in the country’s 2010 civil war. It was eventually defaulted on in 2011 and resumed proper payments in 2012, with a very warm response given to the 2014 and 2015 editions, according to Euromoney.