The Big
Think
Markets : Is this déjà vu ?
By David Crosoer , Chief Investments Officer at PPS Investments
This year has been a challenging period for investors . Global inflation continues to surprise on the upside and central banks respond by hiking short-term interest rates aggressively . At the same time , global growth has slowed materially and geopolitical concerns have increased uncertainty .
This year does not stand out as exceptional compared to previous periods of heightened short-term market volatility . That said , the negative surprises have caused short-term volatility in financial markets to increase as market participants have had to change their minds as to how best to price these assets to better reflect the perceived risks .
So far this year , South African and foreign equities ( in rand ) have experienced negative daily moves of more than -1 % once every five days compared to a historical average of once every seven days . This contrasts with 2008 , for example , where the South African equity market had similar negative daily returns almost once every third day .
A major driver this time around for short-term volatility is investors being less certain where the terminal short-term interest rates will end up ( this impacts on the discount rate that is applied to future cash flows ). They are also unclear how bad the near-term recessionary environment will be ( this impacts on the immediate cash flows ).
The South African Reserve Bank ( SARB ) has hiked the repo rate five times this year , the first two times by 0.25 % ( in January and March ), then by 0.5 % in May and then by 0.75 % ( in July and September ). While the repo rate at 6.25 % remain low by historical standards , market expectations are for a further 1.75 % increase over the next 12 months .
The US Federal Reserve ( Fed ) is also expected to hike the US Federal Funds rate to 4.5 % over the next year after also having raised interest rates five times this year ( including three 0.75 % hikes in June , July and September ). This is a material change in expectations compared to the start of the year when the consensus was that the Fed would only start hiking interest rates in 2023 .
The increase in interest rates and concern that this might result in a significant slowdown in economic activity have adversely impacted the perceived valuation of many companies whose future cash flows are both less certain and now discounted at a higher rate .
12