The rand, which slumped to its weakest level in a year at the end of last week, could be set for more volatility as the discovery of a new Covid-19 variant and the resulting travel bans on the country battered its markets.
The stocks most exposed to the pandemic, hotel and leisure, led declines as the JSE slipped the most since late October 2020 after the UK imposed new restrictions on travel to and from SA, dealing a crushing blow to a tourism industry that was looking at the December holiday season to help it claw back some of its losses.
The discovery spooked investors across the world, with stock markets in Asia, Europe and the US recording huge losses on concern that surging Covid-19 cases, lockdowns and travel restrictions would put the economic recovery in danger.
The rand, which often acts as a proxy of market sentiment towards emerging markets because it is among the most easily traded currencies, dropped as much as 2.5% on Friday, falling to R16.36/$ at one point, the weakest level in a year. It closed 2.1% weaker at R16.3027/$, taking its drop over the past month to more than 8%.
“As one of the most traded emerging-market currencies, the rand will always be first in line to suffer when volatility takes hold,” said Ryan Booysen, MD of DG Capital Forex. “The rand is a sitting duck.”
However, Booysen said, the bad news is “currently in the value of the rand”, something that may then help the currency regain some strength.
The rand has a history of overshooting during times of market hysteria. In the immediate wake of the pandemic spreading across the world in 2020, it almost touched R20/$ in April 2020, only to stage a sharp recovery to a 2020 best level of R14.59/$. As recently as early June this year, it was trading at R13.40/$, its best level since February 2019.
Bond markets were also hit, with 10-year yields, which move inversely to the price, rising to more than 10% for the first time since May 2020.
Hospitality stocks were hardest hit, with Sun International, City Lodge and Tsogo Sun Hotels losing between 10% and 20%, though they later pared their losses. It was a trend seen across the world, with the Dow Jones industrial average in the US having its worst day of 2021. In Europe, IAG, the owner of British Airways, was among the biggest decliners, together with German counterpart Lufthansa.
“We rely on inbound tourism for top-line growth in the sector, especially the UK, which was the biggest source of tourists for SA [before] Covid,” said Abdul Davids, a portfolio manager at Kagiso Asset Management.
“The higher transmissibility, coupled with our low vaccination rate compared to European peers, could result in higher hospital and ICU admissions [which] will force government’s hand to introduce stricter lockdown levels.”
The discovery of the Omicron variant, which has seen other countries follow the UK’s example, is a blow to the broad tourism sector, which contributed 8.6% of GDP in 2019.
Ministers, who faced criticism for being passive when SA was targeted for travel bans after the discovery of the Beta variant, were quick to speak out against travel bans at the weekend.
“Tourism is the biggest loser here again,” said Petri Redelinghuys, a trader and founder at Herenya Capital Advisors. “We have seen some EU nations start locking down before the variant news already, so they might just be itching for a reason, which they now have, to lock down most of the EU again.”
By the JSE’s close on Friday, City Lodge was down 15.09% to R4.22, Sun International 7.45% to R23.10 and Tsogo Sun Hotels 14.2% to R2.90. Tsogo Sun Gaming fell 7.11% to R9.80. The overall index closed 9.13% lower.
The only glimmer of good news for SA was the 11.41% drop in the oil price, which means a weaker currency may not translate to higher local fuel prices and faster inflation.
The latest restrictions come about two months after the UK removed SA from its travel red list, after intense lobbying.
With SA on the red list, anyone entering the UK must isolate in a hotel for 10 days at a cost of over £2,000, making a trip to SA unrealistic for tourists, thousands of whom were scrambling to fly out at the weekend.
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