SA stocks react to global economic challenges

Andrew Bahlmann is the chief executive of corporate and advisory, Deal Leaders International. Photo: Supplied

Andrew Bahlmann is the chief executive of corporate and advisory, Deal Leaders International. Photo: Supplied

Published Mar 4, 2024


Emerging markets - known for their potential high returns but commensurate higher risks - are particularly vulnerable during periods of risk aversion, as we are currently experiencing. Investors tend to seek safe-haven assets in times of uncertainty, such as government bonds or stable currencies, leading to a capital outflow from emerging markets.

This exodus of capital can result in currency depreciation, higher borrowing costs, and reduced investment in these economies.

As global economic challenges persist, South African stocks are feeling the impact of high interest rates, inflation, and geopolitical tensions in major economies. The Johannesburg Stock Exchange (JSE) has been closely tracking these developments, leading to increased volatility and uncertainty in the local market.

One of the key factors affecting South African stocks is enduring high interest rates in major economies such as the US. As the US Federal Reserve tightened its monetary policy to combat inflation, investors shifted their funds away from emerging markets like South Africa in search of higher returns.

This has put pressure on the South African rand and led to capital outflows from the country, causing stock prices to fluctuate.

In addition to rising interest rates, inflation has been a growing concern for South African investors. The surge over recent years in global commodity prices, particularly oil and food, has pushed up inflation rates around the world. This forced the South African Reserve Bank to raise interest rates to curb inflation, further dampening investor sentiment and weighing on stock prices.

Geopolitical tensions in major economies have also played a role in shaping the performance of South African stocks. The ongoing trade disputes between the US and China, as well as conflicts in Europe and the Middle East, have created a sense of uncertainty in the global market. This has led investors to adopt a more cautious approach, resulting in increased market volatility and a flight to safe-haven assets.

Despite these challenges, there are opportunities for South African stocks to weather the storm. This country's strong fundamentals, including a diversified economy, well-regulated financial markets and robust banking sector, provide a solid foundation for long-term growth.

In addition, the government's stated commitment to structural reforms and investment in infrastructure projects is expected to drive economic expansion and create new opportunities for investors.

The above-mentioned “risk-off” approach now prevalent in the financial markets has significant implications for specific sectors such as technology and property.

The tech sector in emerging markets is feeling the strain of risk-off sentiment. Technology companies in these markets often rely on foreign investment and access to global markets for growth. With capital flowing out, such companies may face funding challenges, hindering their expansion plans and innovation efforts. Additionally, a weaker local currency can increase the cost of importing technology components, further squeezing profit margins.

Similarly, the property development sector in emerging markets is experiencing a slowdown for the same reasons. Real estate developers and investors rely heavily on external funding for projects, and a withdrawal of capital can lead to liquidity issues and project delays. Moreover, a decline in property prices and demand can further dampen investor confidence and exacerbate the situation.

In response to the risk-off sentiment, policymakers in emerging markets are implementing measures to stabilise their economies and attract investors. These typically include interest rate adjustments, currency interventions, and structural reforms to improve the business environment.

Exploring safe haven opportunities for investors in the SA market

In a volatile economic climate, investors generally seek safe havens to protect their portfolios from market uncertainties. South Africa, despite its challenges, offers opportunities for investors looking for stability and security. Two popular options for investors seeking safe havens within the South African market are bonds and defensive stocks.

Bonds have long been considered a safe investment option due to their fixed interest payments and lower risk compared to stocks. In South Africa, government bonds are particularly attractive as they are backed by the government's creditworthiness. These bonds provide a steady stream of income and are less susceptible to market fluctuations, making them a popular choice for risk-averse investors.

Defensive stocks, on the other hand, are stocks of companies that are less sensitive to economic downturns. These companies typically operate in industries that are essential to everyday life, such as healthcare, utilities, and consumer staples. In South Africa, defensive stocks can provide investors with a stable source of income and protection against market volatility.

Investors looking to invest in bonds can consider government bonds issued by the South African government, which are available in different maturities to suit varying investment horizons. For those interested in defensive stocks, companies like Aspen Pharmacare Holdings, Naspers, and British American Tobacco South Africa are worth exploring due to their resilience during economic downturns.

While bonds and defensive stocks offer stability and security, it's important for investors to conduct thorough research and seek advice from financial experts before making investment decisions. Diversifying your portfolio across different asset classes can also help mitigate risk and maximise returns in the long run.

Andrew Bahlmann is the chief executive of corporate and advisory, Deal Leaders International. You can follow him on: @DealLeaders @Corpreneur