.1. INTRODUCTION
Covid-19 has devasted economies worldwide. Households and businesses have been struggling to stay afloat while under lockdown, as the virus continues to force governments to delicately balance between saving the economy and saving lives. According to the Wall Street Journal, South Africa’s economy shrank by 51% in the second quarter, which is said to be the worst quarterly decline in at least a century (Wall Street Journal,2020). Consequently, businesses have been faced with retrenchments, loss of revenue and closures. Covid-19 has hurt certain industries more than others, as industries such as technology have seen great upswings. This has led to changes in the mindset and actions of investors, which have greatly impacted businesses in South Africa. In this assignment, analysis of the impact of Covid-19 on the South African stock market is discussed in great detail while looking at Financial Times Stock Exchange Group/Johannesburg Securities Exchange (FTSE/JSE) All share index (ALSI) trends over the most recent five years. This follows with the analysis of the impact on the share price of Spur and then finally a recommendation on how to move forward with shares in the company. The impact of the virus is likely to be felt by economies for years to come which is why it is important that studies are done discussing the impact and what to do in future so that a bad situation does not worsen.
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2. THE IMPACT OF COVID-19 ON THE SOUTH AFRICAN STOCK MARKET In order to analyse the impact of Covid-19 in South Africa, it is important to look at investor behaviour during periods of financial crisis both internationally and nationally. This is done by analysing the trends in stock price movement during historical periods of panic.
2.1. Investment behaviour in stock markets during periods of panic or fear The world has reacted very differently throughout history when in economic uncertainty. A lot can be learnt from mistakes from countries internationally so that in South Africa, what was done wrong can be studied effectively and implement a better plan.
2.1.1. The Romanian Financial Market Lonescu, Vilag, Vasile and Toader (2009) have said that when a country experiences a financial shock, investors may be compelled to withdraw capital that is invested in other countries or markets that are not yet affected because of the market’s reduced liquidity. Furthermore, because many financial transactions are based on the decisions by investors and not theoretical principles, this plays a role of volatility in the market, as individual decisions are made with a lack of co-ordination. According to Lonescu, et al. (2009) during a financial crisis between 2007 and 2008, residents withdrew almost half of their investments. Incidents such as herding, when investors assume other investors strategies and adopt them, seem to occur during periods when investors feel fear or greed. This influences the market short term, but not substantially in the long term.
2.1.2. The Global Financial Crisis of 2008 The global financial crisis that occurred in 2008 is a good example of how behaviour in one country can have a huge spill over effect to other countries. Now, with countries being so integrated with one another due to globalisation, these spill over effects have only increased. According to Brett (2020) a notable effect was the long and steady fall in bond yields. “Central banks saw the need to reduce borrowing costs and therefore slashed interest rates and some began programmes of quantitative easing – creating money electronically and using it to buy bonds. This had the desired effect of reducing bond yields as bond prices rose.” But years after, yields were still falling, becoming extreme so much so that investors were having to pay for a bond instead of receiving interest.
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Since bond prices greatly influence the borrowing costs in a country, this is problematic. Additionally, Europe and Japan stock market indices lost more than half their value (Brett, 2020).
However, despite the huge crisis experienced, central banks all over worked hard to stimulate their economies and the stock markets prior to Covid-19 were doing very well. “US stocks have risen more than 260% since the crisis low in March 2009. UK, European and Asian stocks are all up more than 150% in the same period.” (Brett, 2020).
2.2 . The impact of Covid-19 in South Africa To analyse the impact, it is important to understand the economic and investment background prior to the national lockdown, during, and what steps are being made for post lockdown. These factors have all contributed to the trends being shown in the South African stock market.
2.2.1 South Africa prior to lockdown The economic situation in South Africa even before Covid-19 was not a favourable one. Faced with issues such as load shedding, corruption and unemployment, this left the country in a very vulnerable position that further worsened as the pandemic continued its effect on the country. These factors also already made South Africa a risk for international investors. With the Gross Domestic Product (GDP) falling by 2 percent within the first three months, this was also followed by a descent into its second recession (Cotterill, 2020). In the words of Razia Khan, chief economist for Africa and the Middle East at Standard Chartered, “When an economy’s starting point- even prior to the Covid lockdown- is an unemployment rate that is over 30 per cent, it is difficult to imagine what further deterioration looks like.” With business confidence low and a negative investment outlook, going into a full economic shutdown only exacerbated these outlooks.
2.2.2 South Africa during lockdown As the country entered the proposed three-week national lockdown, the economic and investment situation hit a turn for the worst. On Friday 27th March, the rating agency ‘Moody’s’ downgraded South Africa’s government debt to ‘junk status’ (Outvest, 2020). The downgrade in investment status led to higher interest rates for government and companies. This also means that investors who hold investment in South African government debt, need to sell.
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Table 1: Interest rate/yield between February and March
Source: Refinitiv, Datastream (2020)
As shown in the graph, it is evident that interest rates for Government Debt Yield year projections have increased significantly due to the impact of the downgrading of investment status. This would lead to short-term decrease in performance and thus a decrease in returns for investors. At that point, with the rand plummeting, along with the JSE all share index, it appears to be a turning point for investment in the country.
Figure 1: Rand volatility over the past 5 Years
Source: Business Tech (2020).
It can be witnessed in Figure 1, that there has been a significant amount of volatility experienced within the five years, with an upward incline towards March 2020, heading R17 against the dollar. This impacts investors, as South African investment decreases its value, but foreign investment strengthens. This volatility is expected to be experienced post-covid, as
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the world grapples with simultaneous supply and demand shocks, according to Moody’s (2020).
To take an in-depth look at investment trends, it is critical to understand the FTSE/JSE All share index trends that have taken place.
Figure 2: FTSE/JSE ALSI Graph for recent five years
Source: IRESS Expert (2020)
From the graph, it can be shown that from the January 2016 to June 2017 the stock market was experiences a sideways trend. Then, from June 2017 to September 2018 we experienced a bear market. Furthermore, from that point to May 2019 there was a bull market, leading to a sideways trend between May 2019 and February 2020. There was a sharp decline, indicating a bear market till March 2020 where there was a steady incline, a bull market. Right now, we are seeing a downward movement which from the current point would resemble a bear market.
A general overview of the market for the past five years, would be that it has demonstrated a predominantly sideways movement. From the six-month period between 2016 and 2017, as well as the 12-month period between 2019 and 2020, this has been seen.
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Figure 3: FTSE/JSE All Shares Index according to percentages
Source: Trading Economics (2020)
As further evidence of this claim, this graph shows a clearer image of the trends mentioned above. In 2020, from February, the decline started. In terms of Covid-19, this may be attributable to the president’s announcement, declaring a state of emergency. This was a shocking 42% decline all within the space of one month. As an investor, those who would have benefitted would be those who sold their shares in February and bought again in March. From mid-March there was a shift that started an upward trend, which coincided with the start of lockdown. Perhaps the swift, decisive action from the president presented a better outlook leading to investors building confidence. The continued incline could also be due to the coronavirus stimulus package for the economy, and the rand appreciated marginally with this news (Rissik, 2020). From August, we have started experiencing a slight decline. This could be due increased uncertainty with claims of corruption regarding Covid-19 relief funds trending in the news.
Overall, the outlook for the future remains uncertain. With the announcement of a move to level 1 lockdown meaning a greater opening of the economy and international travel, one would assume we are moving in a better direction economically, with government now placing greater emphasis on rebuilding the economy. With investment decisions shifting more towards projects proposed and in place in South Africa more so than the course of the virus, the outlook seems to be that the worst is behind us in terms of Covid-19 infections, and now we rebuild.
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