Sunday Times, South Africa, 22 March 2020 by Hi​lary Joffe

In​vestors are flee​ing from ... all risk and putting their money in cash Pre​dictably, the ex​treme volatil​ity and sav​age losses on global and lo​cal mar​kets over the past week have prompted calls for mar​kets sim​ply to be shut down un​til calm re​turns. This is never a good idea, nor a fair one, as al​most any​one in the mar​ket would ar​gue. Prices are plung​ing be​cause in​vestors are flee​ing from the height​ened risk they see in the world and in the shares or bonds or de​riv​a​tives in which they are in​vested. A shut​down pre​vents those who haven’t al​ready got out from sell​ing, which is un​fair but also en​sures the sell-off will be even sharper when mar​kets re​open. “Volatil​ity in and of it​self is a nat​u​ral mar​ket force and open mar​ket forces should pre​vail,” says JSE CEO Leila Fourie. Or, as Ninety One CEO Hen​drik du Toit puts it: “You can’t sus​pend re​al​ity.” 

That re​al​ity has been rather ter​ri​fy​ing over the past week or more. A global health cri​sis is alien ter​ri​tory for fi​nan​cial mar​kets play​ers: they don’t know how to model it, how to value it, or when it might end. The re​sult is that in​vestors are flee​ing from any and all risk and putting their money in cash, prefer​ably in the world’s re​serve cur​rency, dol​lars. As al​ways, emerg​ing mar​kets are the first risk to run from, and vul​ner​a​ble but highly trade​able SA is one of the hard​est hit. SA’s eq​uity mar​ket has lost R4-tril​lion of value for the year to date. That’s the sav​ings of mil​lions of South Africans in their pen​sion funds or unit trusts. The volatil​ity in the eq​uity mar​ket has been ex​treme. 

Then there’s the bond mar​ket, where the swings have if any​thing been more ex​treme — and the macroe​co​nomic im​pact po​ten​tially even more sav​age. A huge sell-off saw 10-year bond yields go from 8.5% last week to 11.8% this week. The JSE’s bond mar​ket saw for​eign out​flows of more than R37bn in a sin​gle day as the in​ter​na​tional in​vestors who hold al​most 40% of our lo​cal bonds fled into their dol​lar safe havens. Price and yield are the in​verse of each other, so the mas​sive sell-off means the value of the bonds in​vestors hold has crashed, and that the cost of gov​ern​ment bor​row​ing has spiked. That bodes ill for the pub​lic fi​nances, given the gov​ern​ment’s soar​ing debt level. And higher bond yields could drive up the cost of longer-term bor​row​ing across the econ​omy — even if the South African Re​serve Bank slashes short-term rates, as it did with a sur​prise 100-ba​sis-point cut on Thurs​day. The more im​me​di​ate con​cern was that the bond mar​ket was in free fall — prices moved mas​sively on few trades, as there weren’t enough buy​ers to mop up sales. In other words, liq​uid​ity in the mar​ket dried up, caus​ing ex​treme volatil​ity. 

Mar​ket play​ers were hop​ing for a strong state​ment from the Re​serve Bank, es​pe​cially af​ter other cen​tral banks in​ter​vened this week to in​ject liq​uid​ity into their hy​pervolatile mar​kets. The Bank’s ul​tra-bland state​ment didn’t touch on that — which is why bonds crashed again in its wake — with the Bank com​ing out with a clear view only in re​sponse to re​peated ques​tions. It was only on Fri​day that the Bank an​nounced “changes to [its] money mar​ket liq​uid​ity man​age​ment strat​egy” to ad​dress the con​cerns. Mean​while, if the mar​ket moves were dis​or​derly, at least the plumb​ing worked. SA’s mar​ket in​fra​struc​ture has so far proved up to the task of han​dling un​prece​dented vol​umes of trade. Un​like the New York Stock Ex​change, the JSE has cir​cuit break​ers on in​di​vid​ual stocks, not on the whole mar​ket. Those break​ers have been trig​ger​ing up to 700 times a day in the past week, com​pared to 300 typ​i​cally, Fourie says. All the trades have been set​tled on time and the in​fra​struc​ture is work​ing as it should. But with the en​tire JSE and no doubt many of the mar​ket par​tic​i​pants now work​ing from home, SA’s elec​tric​ity and mo​bile com​mu​ni​ca​tions in​fra​struc​ture will in​creas​ingly be a risk to the func​tion​ing of mar​kets. Keep​ing mar​kets open will de​pend on en​sur​ing trans​par​ent pric​ing and equal ac​cess for all — even when they’re work​ing from home.