The current world economic volatility should be no cause for concern for emerging markets investors. That is according to Rejane Woodroffe, an economist at Metropolitan Asset Managers.
Woodroffe spoke to the Mail & Guardian as markets endured their second rough week. On Tuesday, the JSE All Share Index fell 4,1 % to close at 18 380 before recovering on Wednesday to close at 18 753, up 2,3% but still 15% off its fresh May record. This week also saw the gold price plunge the crucial psychological level of $600 an ounce, to finish on Wednesday at $565. To add to the misery the rand touched R6,90 on Wednesday, its worst level in 11 months. The only positive news was that the world and South African markets withstood news of worse than expected United States inflation data and recovered slightly.
Through all of this, Woodroffe remains unfazed, “Nervousness is coming from the fact that [new Federal Reserve Chairman Ben] Benanke is untested,” she says, reiterating the comforting view that current events bear little resemblance to the crash of 1998. She notes that at the time stock markets were overvalued and now emerging markets are much healthier, as shown by collective reserves of $4,5-trillion.
Signs that the South African economy is in for a rough ride were also shown by the Rand Merchant Bank/ Bureau for Economic Research Business Confidence Index, which fell 4,7% to 82 points. The worrisome aspect of the fall is that it does not take into account last week’s bloodshed on the markets and shock rate hike, suggesting that when the next reading digests these events, confidence might fall even further.
Another factor that may have contributed to the volatility of the past week was in the futures market ahead of the futures close-out on Thursday. This was highlighted by Cadiz, the country’s leading derivatives trading house. Derivatives include futures as a class of instruments.
Futures are contracts, or “bets”, sold on the basis of anticipated movement in price or indices, at close-out they fall due and owners either take delivery or extend. Ahead of Thursday’s close, a significant portion of futures contracts were around the 18 000 points position, suggesting a large portion of bets expected the market would pivot around the 18 000 points. When markets started falling last week, the contract holders feared it might plunge below 18 000 and thus lose them money, and thus rushed to sell off the contracts.