With many people expecting the collapse of the Euro zone, and the SA Information Bill (a little closer to home) providing foreign investors plenty of excuses to take their money out of risky developing markets, trading screens must inevitably be flashing red and green more often than the traffic lights at a busy intersection.
With that being said; due to the overall global climate turning rather pessimistic, we see large capital outflows out of 'risky' developed economies. This has left me with a thought...
When considering the rise of Africa in the future, looking at the current developing economies can we learn from the current market trends? Although I am lacking sufficient data, a thought process follows whereby as a market develops, more and more people transact within a market, yes? This causes more buy and sell opportunities and ultimately instruments such as equity will change hands more often, leading to more price volatility and hence more overall market volatility.
I agree, it may seem speculative however chatting to people familiar with other African markets, it has led me to believe the JSE is more volatile than, for example, the Nigerian or Kenyan market. With more market participants it seems only fair to assume more volatility, up until a certain level. One cannot however apply the same logic and try disprove this looking at the volatility of our big western friends, one needs to take into account the 'law of diminishing returns' into this idea of mine... a sort of plateau will be reached where the growth of a market and its volatility will eventually find some resemblance of an equilibrium, provided market conditions remain stable.
With the BRICS currently flying the flag for the developing nations, can we look at correlations between their growth and market volatility and try to apply it to the rest of the african nations waiting in the wings?
After all, Africa is only untapped market left. Surely there is something we can learn from the development of the BRICS and previously, our Western friends!
The Young Economist.
