{"id":3127,"date":"2020-07-19T12:46:30","date_gmt":"2020-07-19T12:46:30","guid":{"rendered":"https:\/\/thefinanceghost.com\/?p=3127"},"modified":"2020-07-19T12:46:30","modified_gmt":"2020-07-19T12:46:30","slug":"risk-on-risk-off","status":"publish","type":"post","link":"https:\/\/thefinanceghost.com\/index.php\/2020\/07\/19\/risk-on-risk-off\/","title":{"rendered":"Risk-on, risk-off"},"content":{"rendered":"

R<\/span>emember Karate Kid? Well, it had nothing to do with economics or finance, but the famous \u201cwax-on, wax-off\u201d scene always comes to mind for me when people talk about risk-on or risk-off.<\/p>\n

This concept tries to explain why the South African market moves for reasons that have nothing to do with South Africa.<\/p>\n

In times of crisis or when investors are having a wobbly in general, emerging markets suffer. This is the \u201crisk-off\u201d trade and is a result of a flight to safety for capital. If the world is going to go through a rough patch, most people think that their money is better off in US stocks than here in South Africa.<\/p>\n

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Because enough people believe this and therefore sell their South African exposure, which drives our asset prices down and weakens the Rand, it becomes a self-fulfilling prophecy.<\/p>\n

Conversely, when the risk-on trade is in play, we benefit even when Eskom seems unable to function and our economic growth is pedestrian at best. That\u2019s why the Rand can strengthen when there is seemingly no good news at home to justify it.<\/p>\n

First quarter of 2020: record breaking risk-off<\/h4>\n

Latest SARB data shows that, unsurprisingly, Q1 2020 saw the highest outflows on record. Foreigners sold nearly R100bn of South African stocks and bonds as they grabbed their money as quickly as possible.<\/p>\n

Where did the money go? Just take a look at Dollar strength and the huge valuations of listed tech stocks and you\u2019ll have your answer. Apparently, buying tech stocks at all-time highs is a \u201crisk-off trade\u201d \u2013 sigh.<\/p>\n

We never do ourselves any favours<\/h4>\n

While overall global pain was certainly the biggest contributor to these outflows, our downgrade to junk status by Moody\u2019s didn\u2019t help. Many global investors simply aren\u2019t allowed to hold junk assets because it falls outside the scope of their mandates.<\/p>\n

Many would have already sold out of SA in anticipation of the downgrade, but passively-managed funds can\u2019t do that e.g. government bond index tracker funds. They would have had to wait for an actual downgrade to trigger the sales.<\/p>\n

The downgrades took an unpleasant situation and made it unbearable.<\/p>\n

These outflows explain what happened to the Rand<\/h4>\n

As foreign investors dumped nearly R100bn of South African assets, it\u2019s easy to see why the Rand nose-dived. The Rand is a function of supply and demand, like every other tradeable asset. When people are running for the exit, nobody wants to buy Rands and the exchange rate tanks.<\/p>\n

The money hasn\u2019t come back<\/h4>\n

Foreign holdings of SA government bonds are at the lowest level in 8 years. Just 30.6% of our bonds are held by foreigners. The painful sell-off of our bonds prompted the South African Reserve Bank to buy our bonds in the secondary market, simply to avoid a complete collapse in our bond market.<\/p>\n

It\u2019s not sustainable for South Africa to print money to fund itself. Eventually, that\u2019s called Destination Zimbabwe. We need international investors to see value in South Africa or raising capital to run the country becomes difficult and expensive.<\/p>\n

Unfortunately, as we are now a couple of notches into junk status, it\u2019s going to be a hard fight to get back to investment grade. Even if we do everything perfectly (which we won\u2019t), we won\u2019t get back there in the next 3 years.<\/p>\n

We have to prepare for risk-on<\/h4>\n

At some point, the risk-on trade will come back. The Dollar looks a little too strong currently, although long-term the Rand will still depreciate against the USD.<\/p>\n

When investors feel better about the world and the risk-on trade returns, we need to be ready to show the world that we are an attractive investment destination.<\/p>\n

Perhaps we could start by just keeping the electricity on…<\/p>\n","protected":false},"excerpt":{"rendered":"

Remember Karate Kid? Well, it had nothing to do with economics or finance, but the famous \u201cwax-on, wax-off\u201d scene always comes to mind for me when people talk about risk-on or risk-off. This concept tries to explain why the South African market moves for reasons that have nothing to do with South Africa. In times of crisis or when investors …<\/p>\n","protected":false},"author":2,"featured_media":3126,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_mi_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[26],"tags":[210,71,211,209,212,45,67,66],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/thefinanceghost.com\/index.php\/wp-json\/wp\/v2\/posts\/3127"}],"collection":[{"href":"https:\/\/thefinanceghost.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/thefinanceghost.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/thefinanceghost.com\/index.php\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/thefinanceghost.com\/index.php\/wp-json\/wp\/v2\/comments?post=3127"}],"version-history":[{"count":0,"href":"https:\/\/thefinanceghost.com\/index.php\/wp-json\/wp\/v2\/posts\/3127\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/thefinanceghost.com\/index.php\/wp-json\/"}],"wp:attachment":[{"href":"https:\/\/thefinanceghost.com\/index.php\/wp-json\/wp\/v2\/media?parent=3127"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/thefinanceghost.com\/index.php\/wp-json\/wp\/v2\/categories?post=3127"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/thefinanceghost.com\/index.php\/wp-json\/wp\/v2\/tags?post=3127"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}