An analysis of the South African equity market and sector return-risk relationship (January 1990-December 2002).

Abstract

The research paper is an analysis of the South African equity market and sector return-risk relationship. The following two basic questions, addressed in the research paper, pertain to the South African equity market for the period January 1990 to December 2002: (1) how did equity prices behave; and (2) what were the fundamental factors that caused these price movements? Two contrasting sub-periods are identified, namely, Period 1 (January 1990 to June 1997 and Period 2 (July 1997 to December 2002. Period 1 is the pre-Asian financial crisis period and Period 2 is the post-Asian financial crisis period. During the thirteen-year period (1990 to 2002) a market index explained most of the effect on market and sector returns. However, the composition of this market index varied between Period 1 and Period 2. During Period 1, when equity prices and the rand exchange were relatively stable, the market index was composed of domestic systematic risk. This signified that investors were looking 'inwards' or were more concerned about domestic fundamentals i.e. domestic financial stability. Contrastingly, during Period 2, when equity prices and the rand exchange were relatively volatile, the market index was composed of foreign systematic risk. This signified that investors were looking 'outwards' or were more concerned about global fundamentals i.e. global financial stability. It was further found that over the course of January 1990 to December 2002, South African equity sector returns from the resource, financial and non-resource/financial sectors had experienced abnormal returns. The abnormal returns indicate sector inefficiency and/or cognitive biases in investor behaviour.