Investors no longer care about volatility, or about emerging markets
Stocks, bonds and currencies are jumping on and off the charts in such volatile trading that it mirrors conditions during the final quarter of 2008. Yet investors do not seem to care, with the VIX failing to respond by signalling a commensurate investor distress.
Late 2008 and early 2009, the so-called “fear index” – the VIX – was a vibrant tool. Investors typically used this instrument to hedge against investment losses resulting from unprecedented and unpredictable market volatility. Over the past six weeks, all major international markets for most popular asset classes have been on roller-coaster peaks and dips, but it did not lead to the correction widely expected by the bears, and it prompted only more volatile trading, actively sought-for by the bulls.
Volatility has become commonplace, and I suspect it is welcomed by more investors and traders than would care to admit that they love it. Much has been written over the past five years about volatility, with the bulk of the contributions focussing on ways to trade a volatile environment successfully, that is, for gain on behalf of one’s clients. I sense that most investors have become so used to large swings in asset prices that it does not scare them any longer. The basic attitude I encounter is one of nonchalance – what we lose today we will make up tomorrow, seeing that the markets are prone to regain whatever territory has been lost.
If, at the end of 2008, markets would have been as volatile as they are now, it would have led to even greater calamity. But in 2014 it hardly gets a nod, only a tacit agreement amongst traders that today it is my turn and tomorrow yours.
Following the Nikkei 225 index in Japan, it completely amazes me how the leading index of a very significant economy can shed more than 1.5% a day for several days in a row, and then bouncing back with a 3% gain in a single day on Wednesday. This shows me the scaremongers were wrong when they so adroitly warned against the Japanese Prime Minister’s stated intention of creating inflation of around 2%. But the general consensus then was that the Japanese economy would lose the confidence of foreign investors and that Japanese government bonds would go the way of Greece or Italy. That has not happened. Japan still pays close to zero for its borrowed capital, and investors still flock to yen-denominated stocks and bonds. The fact that this cannot continue indefinitely is an issue that does not feature on their investment horizon. It is also, or so it seems, of no concern to the investors who continue to pump trillions upon trillions of other people’s money into Yen instruments.
I realise it is entirely premature and unrealistic to try and fathom what motivates investors, but perhaps the oft-quoted search for yield is, after all, the biggest elephant in a whole room full of elephants. Of course, this is no consolation to us living in the developing world trying to make a living by anticipating market movements in what is conveniently (usually) described as emerging markets. But the incendiary debate over capital flows has not ended, and the disruptive impact of uncontrolled capital flows has also not seen its last.
The most recent volley was fired by the governor of the Indian central bank, who blatantly said that the search for yield by investors of industrial countries is doing emerging market economies no good. The governor’s assessment of capital flows was presented to a very august audience, one which any emerging market governance structure would go to very great lengths not to upset. But his sentiments on capital flows were echoed by several other authorities in the so-called BRICS countries.
We, in particular, are heavily exposed to the exchange rate of South Africa’s Rand. When investors flee the Johannesburg Securities Exchange and the Rand takes a nose dive, as started in the second week of December last year, through our common currency link we are just as much subjected to the volatile currency as the South Africans themselves.
I do not want to be overly pessimistic, but if the eventual impact on capital flows – once the US Federal Reserve completely stops all liquidity boosting – is as severe as I anticipate, we shall be exposed to the pain when the currency collapses and the JSE pulls back from its lofty 48,000 index points.
I am not predicting a southern African calamity, but capital flows certainly hold the potential to do us much harm. Imagine the consequent local inflation when we have to pay, abruptly, about N$20 per litre for fuel, all because the Rand lost another 40% of its value, all because foreign investors took their money and fled.
