THE eurozone debt crisis continues unabated with French,
Spanish and Belgian bonds suffering and signs that the Netherlands, Austria and
Finland could soon be sucked in.
South Africans who have capital invested in one way or the
other on the JSE should be worried, because their investments would be
negatively affected by ongoing mayhem on the markets.
These investments, held through pension and retirement funds
on the JSE, have gone down in value as markets make losses. Anyone who is
financially stretched and hoping to cash in on their investments may be unable
get any value from them.
And this terrible state of affairs does not appear to be
ending, as South African equity markets are not showing signs of making strong
gains anytime soon. Anybody with a pension, those considering retirement and
savers will be distressed by the hammering equity markets have received in the
past few months.
According to the National Treasury, pension fund money
invested in equities amounts to R1.87 trillion while research recently released
by Investment Solutions and Alexander Forbes indicates South African pension
fund members have lost an estimated R121bn between the JSE's highs and lows
this year.
This shows how many South Africans are directly affected by
the uncertainty in global share markets.
Crisis continues
Eben Karsten, portfolio manager at Blue Ink Investments,
says the third quarter of 2011 was another difficult quarter for local equity
markets due to the crisis in Europe.
“The rand depreciated by as much as 13% as foreigners
liquidated (cancelled) risk positions, particularly in equities. In US dollar
terms, the ALSI (All Share [JSE:J203] index) was down more than 20% over the third
quarter.” He says the ALSI recorded its third consecutive negative month in
September, closing 3.16% weaker.
In addition, the eurozone crisis will have a negative impact
on banks, hitting anyone wanting a loan or mortgage.
This week, chief executives of South Africa's big four banks
- Absa Group [JSE:ASA], Standard Bank Group [JSE:SBK], FirstRand [JSE:FSR] and Nedbank Group [JSE:NED] - admitted they feared they could also suffer from the
contagion effect of default in the eurozone because South Africa's economy is
closely entwined with that of Europe.
They attributed this to a possible surge in risk aversion.
Insurance companies also invest in the stock market, so
there will eventually be an increase in the cost of premiums and the products
available.
Anyone who receives a bonus in shares may well find these do
not carry value as much as anticipated.
Trade ties
Eurozone contagion will not only affect equity markets, but
will hit the entire South African economy as the European Union as a bloc is
the country's single largest trading partner.
European consumers acquire a great deal of South African
goods, and South Africa has strong economic connections with major European economies
such as Germany and France.
According to the European Commission, the EU exported goods
worth €21.507m to South Africa last year. EU goods imported from South Africa
were worth €17.912m in 2010.
South Africa's primary exports to the EU are fuels and
mining products (27%), machinery and transport equipment (18%) and other
semi-manufactured goods (16%).
EU exports to South Africa are dominated by machinery and
transport equipment (50%), chemicals (15%) and other semi-machinery (10%).
As eurozone governments cut back on expenditure, business
conditions would deteriorate globally and increase unemployment in trading
partner countries like South Africa.
This will be followed by less demand from historically
strong countries and dampen trade levels in South Africa.
Paul Stewart, the managing director of Plexus Asset
Management, says as a result South African farmers exporting fruit and other
products to Europe will experience declining prices, volumes and demand which
will hit profitability.
Karsten warns there is very little room for complacency now.
"There is a growing realisation that developed market
economies are in the midst of a prolonged period of sluggish growth, supported
only by low interest rates," Karsten says.
"There are a number of varied risks that could cause
equity market returns in particular to be far less than what market
participants expect."
Glenn Silverman, chief investment officer at Investment
Solutions, says since "few governments are prepared to swallow the bitter
pill, the crisis looks set to continue without resolution for some time to
come".
- Fin24