The future of financial indicators
You’re driving in your car, listening to the 6pm news bulletin on the radio. The news ends, the anchor reads the weather forecast and then gives the financial indicators. She rattles off the gold price, the rand-dollar exchange rate, the price of Brent crude oil …
By now you’ve either perked up or zoned out. In the digital age, with a plethora of information at our fingertips, is the practice of tracking financial indicators still important? If it is, which indicators should we be paying attention to and why?
Gold and platinum
Take, for example, the gold price. Decades ago, its relevance was indisputable; in the 1970s it constituted upwards of 50% of South Africa’s economic activity. But that’s no longer the case. Nowadays, the entire mining sector makes up only about 5% of our gross domestic product.
“It has lost some of its relevance, admittedly,” said Ian Cruickshanks, chief economist at the South African Institute of Race Relations.
“However, the gold price does other things. It shows how much uncertainty there is in the market. Every time there is any anticipation of financial disaster, the gold price goes up, because it is seen as a safe haven and a reliable store of value,” he said. “The gold price does matter.”
So if the gold price increases, what does that mean for the average South African?
“It may make international trade more difficult for us,” said Cruickshanks. “We might battle to sell our exports. It might make the cost of credit higher, because it will become more expensive for the government to borrow internationally,” he said. “There’s a strong ripple impact there.”
The gold price “is a sanity check”, said Bruce Whitfield, the anchor of Radio 702’s Money Show.
“Mining is still a big employer,” he said. “At its peak, gold was over R20 000 an ounce. Now it’s around R16 000. It doesn’t take a rocket scientist to work out that’s not great for jobs and exploration.”
But then there are other indicators. The platinum price is often included in updates, perhaps as a throwback to a bygone era.
“I’m not sure the platinum price is really that useful, to be honest,” said Giulietta Talevi, an anchor at BusinessDay TV. “Because people don’t buy platinum as obviously as they do gold, and because it has an industrial use, its movement could be due to a host of factors.”
Understanding the context around the indicators is key, said Whitfield. Without that, the numbers become useless. “It’s important to stress the trends around the prices,” he said. “In isolation, they are meaningless and should be done away with.”
What if we remove financial indicators from news updates? Would anyone even care? Overall, it seems yes. And some, very deeply.
Michael Avery, the anchor of Classic Business on Classic FM, said: “If we were to remove the indicators, our listeners would burn the station down. Well, maybe that’s a bit melodramatic, but people do listen out for the indicators and comprehend their broader macro impact,” he said.
Whitfield said he has tried from time to time to omit some of the indicators. “The response from listeners makes life not worth living,” he said.
All the opinion leaders agreed that indicators remain relevant, especially when viewed in context.
“Indicators are vitally important tools if you are a trader,” said Avery. “Even if you’re a long-term investor who shouldn’t be prone to react to short-term movements and volatility in indicators, you need to keep an eye on the trends and patterns that develop over time.”
Currency and bonds
Which indicators should we be tracking most closely?
“Currency rates are really important,” said Talevi. “They don’t simply affect players in ‘the market’, they’re a key consideration for importers, exporters, travellers and business owners, as well as the rest of us. If there’s a consistently weak rand, the most basic knock-on effect is the fuel price, and that affects us all.”
Paying attention to the rand-dollar exchange rate and some of the others, such as the euro-dollar, “almost tells you everything you need to know about any given day’s trading action”, she said.
“A strong dollar? People might be ‘buying the US’ at the expense of emerging markets, say. It also means they’re buying US bonds, so that probably tells you they’re somewhat nervous of stocks. A strong dollar normally means that your commodities will be weaker, and that has global ripple effects.”
A weak rand in the absence of any other emerging market stress can reflect domestic issues, she said. “So you might ascertain that foreign traders are selling us (the rand) and then you would ask, why? The currency also has a ripple effect on the largest, most multinational shares on the JSE, which are much more currency sensitive than they ever used to be.”
Arthur Kamp, investment economist at Sanlam Investment Management, closely tracks bond yields on the local, US and emerging markets.
“My favourite financial indicator is long-term interest rates,” he said. “The bond market interprets a huge amount of economic information and draws a conclusion on what this information is likely to imply for us,” he said.
“Specifically, changes in long-term interest rates reveal a lot about the bond market’s expectations for growth, inflation and the future course of fiscal policy, as well as what the market thinks this means for the future course of short-term interest rates,” he said.
Cruickshanks said: “The top 500 companies on the NYSE [New York Stock Exchange] surely is a better indicator of global activity than anything else. The US economy makes up 23% of total global activity. The US is also one of our larger export destinations. If they’re in the doldrums, so is everyone else.”
Avery said: “The forex rates. Why? Because theorising over the rand is a South African sport and the forex rates are the quintessential snapshot of the health of the economy and determine the direction of earnings for industrial rand hedges, commodity producers and so on.”
He added that “a little used but very interesting financial indicator is the Baltic Dry Index. The exchange directly contacts shipping brokers to assess price levels for a given route, product to transport and … speed. It’s basically used as a dipstick into the health of global trade,” he said.
So how much attention should we pay to this?
As with many aspects of investment, more is not always better. Kamp said he tries “to find a balance between following economic and financial indicators and ignoring them”.
“On the one hand, one needs to stay up to speed with all the high-frequency data. On the other hand, near-term changes … are difficult to interpret. In the current uncertain global economic environment, volatility in asset prices can send confusing signals.”
So pick your favourite indicators and make them your friends. That said, don’t hinge your every decision on their moods. If the rand-dollar exchange is having a bad day, it’s often wiser to give it some space rather than rush to the bank and end the relationship.