Johannesburg's benchmark stock index is headed for its worst month in almost two decades, facing a double whammy as the Iran war saps demand for emerging market assets, while falling precious metals prices hit the country's miners.
The FTSE/JSE All Share index was down 13% at Friday's close in the month to March 27, the most since the peak of the global financial crisis in September 2008, according to data compiled by Bloomberg. It's a sharp turnaround after posting 12 consecutive monthly gains dating back to February, the longest such period on record.
The precious metals and mining sector, which accounts for a quarter of the index's weighting, has fallen 27% since the start of the Middle East conflict, wiping out this year's gains as gold and platinum prices fell. It comes amid a widespread selloff of emerging market stocks as investors worry that rising oil prices will fuel inflation, forcing central banks to raise interest rates.
“Profit-booking in precious metals counters on risk-off has exacerbated the impact on South African equities,” SBG Securities analysts Dean Gordon and Adele Fermoyle wrote in a note.
South African shares were one of the big winners of the past year, rising 43% in the 12 months to February on the back of a strong surge in gold prices and signs of low inflation.
But with oil prices rising above $100 a barrel and the war in the Middle East weighing on investor sentiment, investors have increasingly backed out of bullish bets. The losses now mean South African stocks are among the worst-hit in the world, with only Dubai, Indonesia and Korea having fallen more since the start of the war.
It is not that only the miners have drowned. Construction and materials, retailers and banks were among the sectors that declined more than 10% this month.
Some investors remain positive on South African shares, seeing this month's decline as an opportunity to increase risk. In March SBG Securities reiterated its overweight outlook on South African shares, with analysts reporting that foreign investors were still net buyers of South African shares year-to-date.
“Within Africa the JSE usually reacts negatively in the first phase of the conflict, like any risk market, but over time it is often in a better position than many other African exchanges due to its depth, liquidity and its large resource exporters,” said Cedric Beguer, head of investment strategy at Mauritius-based AXYS Group.
But the extended conflict in Iran will hamper any potential recovery as sustained high energy prices fuel inflation. The South African Reserve Bank last week lifted its inflation forecasts and warned that a prolonged war would push interest rates higher, which would weigh on economic growth. According to Avior Capital Markets, this is likely to lead to selling in sectors other than mining.
“In a risk-on environment, emerging markets and South Africa remain out of favour,” said Adrien Demant, an analyst at Avior. “Retailers, banks, property and insurers will be negatively impacted by higher interest rates and lower growth.”
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