SA equities: no escaping the global trend
For domestic equity market investors, there is no getting away from the effects of global market influences. Research conducted for the Cape Town based Economic Research Southern Africa (ERSA) confirms that price behaviour on the Johannesburg Stock Exchange is indeed positively correlated with international equity market movements. Significantly, though, this sensitivity is not symmetrical: local prices tend to react far more to negative global news than they do to positive news.
In “The relationship between International Equity Market Behaviour and the JSE”, Nick Samouilhan examines daily market price data for nine years to show that there is a positive correlation between domestic and international market returns, and between domestic and international price volatility. In particular, he finds that about one-fifth of the daily movement in the local equity market is determined outside South Africa.
He uses price movements on the London Stock Exchange as a proxy for international market price movements.
Samouilhan finds that this correlation exists during concurrent trading periods: international market price movements feed to the South African market on the same day, although there are additional lagged influences, too.
The extent of the domestic sensitivity to international price movements varies by equity sub-sector. Domestic orientated sectors, including cyclical consumer stocks, are minimally influenced by what happens abroad, while sectors such financial and information technology are highly sensitive to international price developments.
Samouilhan points out, though, that the extent of this price responsiveness is far from fixed and that the degree of price sensitivity in the local market varies over time.
