EDITORIAL: One certainty in the uncertainty: there’s more pain ahead
Just when virus-hit markets thought things couldn’t get worse, the Saudis twist their knife in
When people use the term “adding fuel to the fire”, they are usually not being literal.
That cannot be said about the actions of Saudi Arabia over the weekend, which injected a new round of volatility to a market reeling from the spread of the coronavirus.
Even before Friday’s discussions between Opec and Russia over proposed production cuts broke down on Friday, the oil market was already under severe pressure as economies count the cost of virus-induced losses. With factories standing idle and airlines reducing capacity as travellers balk at getting onto aeroplanes, sliding oil prices were not a great surprise.
And neither was Opec’s attempts to manage the fallout by seeking to contain supply. That meeting did not go as planned, with Russia objecting to the deep cuts proposed by the Saudis, the second-biggest producer in the world after the US.
Potential motivations for the Russian stance vary, but explanations centred on its desire to take on the US shale industry, which has made that country the biggest producer of oil. Lower crude oil prices would inflict further harm on US fracking companies, which have struggled to turn volumes into profit.
Saudi Arabia decided to retaliate against the Russians by agreeing to cut its prices, also in the hope of winning greater market share for itself. And that’s why we woke to a market bloodbath on Monday.
But shouldn’t lower oil prices be good for consuming countries and a welcome relief for a global economy in desperate need of some sort of stimulus? Based on what happened in currency markets, one would be tempted to say, in this case at least, the answer is not necessarily.
In the current environment, where factories are idle and consumers aren’t in a position to spend, the sharply lower oil price is of little comfort. If anything, it’s more of a signal of the desperate state in which the global economy finds itself.
From about R15.78/$, the rand quickly crashed through R17/$, though much of that was driven in light trading before local markets had opened. By 2pm on Monday, it was back hovering around the R16/$ area. At the other end of the world, the Australian dollar suffered a “flash crash”, losing about 5% in the space of 20 minutes.
All we can tell from the data is that there’ll be more volatility ahead. At the open on Monday, the S&P 500 plunged 7%, prompting a suspension of trade, another confirmation that the Saudi move was the last thing the market needed.
As with what happened globally, energy stocks locally were most hard hit on Monday, both by the declining prices and increasing speculation that the world economy is headed for a recession.
Sasol was already having a terrible time due to its troubled Lake Charles project, which contributed to it being downgraded to subinvestment grade by Moody’s Investors Service. Anyone who saw its drop of about 6% on Friday as a buying opportunity would have got a bloody nose on Monday morning, seeing it down more than 50% in morning trade.
The long-term effect of the current instability is probably too difficult to judge as the world seeks to come to grips with the virus’s outbreak and trying to bring it under control.
One thing that can be said with any degree of certainty is that there’s still some short-term pain to come — at least, we hope it will be short term. Anyone overexposed to sectors that are consumer-facing, from retailers to banks, might decide not to look at their portfolios for a while.
For the brave and those who are not only skilled at spotting openings but are also able to keep their heads while those about them are losing theirs, this could be a time of great opportunity.
One of the greatest follies investors, especially on the retail side, succumb to is to buy at the top and sell at the bottom.
But as the Sasol example shows, just because things look bad it doesn’t necessarily mean the worst is behind us. Who would want to be a financial adviser today?