Riding the bucking horse of volatility
Markets steady as traders grow thicker skins
NEW UNCERTAINTY: Jeremy Corbyn, leader of Britain’s Labour Party, arrives at Labour headquarters in London on Friday. Labour shocked by ensuring the UK had a hung parliament after elections this week ON Friday the world woke to even more uncertainty as the British public failed to give Theresa May the mandate she was looking for to go into Brexit negotiations. This is yet another black swan event in a world that is fast getting accustomed to shocks, such as the rise of Donald Trump.
On the domestic front, political uncertainty has been a feature as the ruling ANC heads to its December elective conference. The height of this uncertainty was reached with the dismissal of Pravin Gordhan as finance minister earlier this year.
It was a move that ushered in a credit downgrade, and falling confidence levels that have left the economy in its first recession in eight years.
Despite all this, volatility or fear indices, as they are known, don’t seem to have received the message, as they have been heading on a downward trajectory globally.
An analyst who could not be named due to his company’s policy said that traders were developing a tougher skin and not having the same knee-jerk reactions that were prevalent in the past.
There was more of a wait-andsee approach: “You have guys who trade those markets every day and look at events and are not too quick to adjust their perception of future volatility,” he said.
“I think [traders] have learnt not to have crazy reactions at first because [the market] relatively comes back; we are coming to a different regime where [traders] don’t go pushing volatility up too high.”
He added that traders had more information and better systems compared with 2008.
The South African Volatility Index (SAVI) — the JSE’s own volatility index — isn’t any dif- ferent: both its indicators for the rand/dollar exchange and the JSE Top 40 have been on a steady downward trajectory, with only a few slight bumps.
The axing of former finance minister Nhlanhla Nene in December 2015 pushed volatility up by 31% to its highest point in early February last year until it started to drop.
However, Gordhan’s removal from his post had barely caused a marginal change to volatility, which continued on its downward trajectory.
The SAVI Top 40 is currently in its third-lowest period since 2008, when it spiked to 57.86 points after the global financial crisis, which was triggered by the Lehman Brothers’ collapse.
The index reflects the shortterm options of the Top 40 shares on the JSE or dollar/ rand exchange. It is calculated as the weighted average prices of all call and put options of shares in the index over a threemonth period.
South African growth remains a concern — it was announced this week that the country was technically in a recession
It is difficult for SA to do badly when the world is doing well
after the economy had contracted by 0.7% in the first quarter of the year.
Partly reflecting the bias to its dual-listed heavyweights such as BHP Billiton, the JSE All Share index hardly reacted, and by the end of the week was only slightly over 2% weaker. The SAVI Top 40 had only registered a slight jump in volatility.
Although stock exchanges across the globe took a knock after the election of Trump late last year, they soon recovered their swagger — rallying to what was until recently called the “Trump Bump”.
Arthur Karas, co-manager of the Old Mutual Edge 28 Life Fund, said that the difference between the current situation and the one a few years ago was that the global economy was in a better place right now. Globally gold, bonds and stocks and even Bitcoin have been on an upward trajectory this year.
Karas said that it was very difficult for South Africa to do badly when the rest of the world economy was doing well.
The current events were taking place against a different backdrop and that was why they were not having the same impact, he said.
“Volatility is lower than before because we are in a bull market, but there are parts of the market that are doing very badly,” Karas said.
The world was exiting a period of easy money that was in place to support the global economy, he said, but the US had indicated it would raise interest rates this year: a pointer towards recovery.
Access to easy money encouraged different type of behaviour and boosted certain types of investments, Karas said.
Richard Böttger, chief information officer at Tower Capital Management, said he was not surprised by SAVI’s current performance and that it was just following the market’s trajectory in the opposite direction.
Because of the make-up of the companies in the SAVI Top 40 many of them were not exposed to the domestic risk of the country as they earned much of their revenue in dollars or euros, Böttger said.
However, he expected it would spike at some stage as the current trajectory could not continue.